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The Capital Market and Its Players — Why Are Secondary Markets Important?
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Why Are Secondary Markets Important?

Why Do We Need a Secondary Market?

The secondary market is important for a number of reasons:

  • From the investors’ point of view, the key function of secondary markets is to provide liquidity and fair prices for the securities traded on those markets. Market liquidity refers to the extent to which a market allows investors to easily buy and sell securities at stable, transparent prices.
  • Another reason why the secondary market is important is because it provides a clear benchmark for a fair valuation of a company, and helps drive the securities' prices towards their genuine, fair market values through supply and demand. Each trade in the market means there's a seller who values the security less than its price at the time of the trade and a buyer who believes that the security is worth more than the price.
  • The secondary market also serves as a good measure of the overall economic well-being of a region. The rise or decline in share prices reflects a rise or recession in an economy's business cycle.