What is a Secondary Market?
- The amount the seller receives following the sale of an asset after all costs and expenses are deducted.
- Where securities are traded by investors
- The value of the assets of the Company or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
- None of the above
Answer: b. Where securities are traded by investor
An investor buys and sells existing financial instruments, such as stocks, bonds, and other securities, on a secondary market, which is referred to as a financial market. These financial instruments are traded between investors on the secondary market, and the proceeds of these transactions go to the buyers and sellers, not the issuing company. It is also commonly called the “stock market” or “security market.”
Why the other options are not correct
a. The amount the seller receives following the sale of an asset after all costs and expenses are deducted
As opposed to the secondary market, this option describes the concept of “net proceeds” rather than the amount the seller receives after deducting all costs and expenses associated with the sale. Net proceeds are determined by subtracting all costs, expenses, and taxes associated with an asset sale. While the secondary market may determine the price at which the asset is sold, it is not directly related to the calculation of the seller’s net proceeds.
c. The value of the assets of the Company or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
This option seems to describe the term “net asset value” (NAV) rather than the secondary market. A company’s net asset value is the value of the assets (minus its liabilities) per share or unit of ownership. Mutual funds and exchange-traded funds (ETFs) use it as a measure of their value. However, it does not define the secondary market in any way.
d. None of the above
In this option, it is stated that none of the previous options (A, B, or C) adequately describe a secondary market. However, this is incorrect, since option B does illustrate a secondary market: securities are traded by investors.
The secondary market is an essential component of the financial system. It enables investors to buy and sell securities that have already been issued. By facilitating liquidity and transparency in the market, investors are able to access capital. Investors diversify their portfolios, and make investment decisions based on market conditions.
It is imperative for investors to understand the secondary market, as it affects the valuation of their holdings and their ability to buy or sell securities at a fair price.