Question

Secondary market is the supporting factor for primary market. Discuss the functions of secondary market which helps in successful operation of primary market. Support your answer with real time examples in Oman . (500 words)

Answer 1

Functions of Secondary Market

• A stock exchange provides a platform to investors to enter into a trading transaction of bonds, shares, debentures and such other financial instruments.
• Transactions can be entered into at any time, and the market allows for active trading so that there can be immediate purchase or selling with little variation in price among different transactions. Also, there is continuity in trading, which increases the liquidity of assets that are traded in this market.
• Investors find a proper platform, such as an organised exchange to liquidate the holdings. The securities that they hold can be sold in various stock exchanges.
• A secondary market acts as a medium of determining the pricing of assets in a transaction consistent with the demand and supply. The information about transactions price is within the public domain that enables investors to decide accordingly.
• It is indicative of a nation’s economy as well, and also serves as a link between savings and investment. As in, savings are mobilised via investments by way of securities.

The ease of selling stock on the secondary market affects the willingness of investors to buy stock on the primary market.Unlike primary markets, which set stock prices before stocks are issued, secondary markets allow stock prices to develop based on supply and demand .

The new issue market provides a direct link between the prospective investors and the company. By providing liquidity and safety, the stock markets encourage the public to subscribe to the new issues. The marketability and the capital appreciation provided in the stock market are the major factors that attract the investing public towards the stock market. Thus, it provides an indirect link between the savers and the company.