Secondary Markets for Equity Securities

Pangan, Mary May

ABSTRACT

This paper presents a complete review of equity securities in the context

of the secondary market. The study begins with an introduction that defines
equities securities and provides an overview of the securities market, then goes
into the mechanics and significance of the secondary market. It explains the
many forms of secondary markets, including exchanges and over-the-counter
(OTC) marketplaces, as well as their responsibilities and importance. This paper
investigates the secondary market trading cycle, providing deep insights into the
exchange and OTC trading processes. It illustrates the stages involved in issuing
and listing securities, as well as order placement, matching, and settlement. The
paper, which focuses on the Philippine Stock Exchange (PSE), covers the
investment technique and trading cycle in the Philippine market.

In addition, the paper covers numerous products traded in the secondary

market, classifying them as fixed income, variable income, and hybrid
instruments. It also identifies and investigates the secondary market's important
actors, who include investors (both individual and institutional), intermediaries
such as broker-dealers and market makers, clearing houses, and regulatory
agencies. The paper examines the secondary market's benefits and limits,
providing a comprehensive understanding of how it operates.

Keywords: Secondary Market, Equity Securities, Secondary Market, Exchanges,

Over-the-Counter Markets, Trading Cycle, Philippine Stock Exchange, Investing
Procedure, Fixed Income Instruments, Variable Income Instruments, Hybrid
Instruments, Investors, Broker-dealers, Market Makers.
 I. INTRODUCTION

As stated by CFE Institute (2024), Equity securities are a cornerstone of

the global financial system, functioning as fundamental vehicles that reflect
ownership interests in companies. These instruments, which comprise common
and preferred stocks, provide investors with an interest in the issuing company's
ownership and future prospects. popular stocks, the most popular type of equity
instruments, grant ownership and voting rights, whereas preferred stocks provide
predetermined dividend payments and preference over common stockholders in
the case of liquidation.

The securities market, often known as the stock market or equity market,
is the major venue for the trading of equity securities among investors. It
functions as a dynamic marketplace in which corporations issue securities to
obtain cash and investors trade them depending on their perceptions of the
company's prospects and market circumstances. In this sense, the securities
market plays an important role in effectively allocating capital across the
economy, moving cash from savers and investors to enterprises and projects with
development potential.

Aside from its role in capital generation, the securities market serves as an
indicator of economic health and investor attitude. Stock price fluctuations reflect
changes in market expectations, economic conditions, company performance,
and geopolitical events. Furthermore, the securities market is inextricably tied to
larger economic trends, technology improvements, and regulatory developments,
shaping and being molded by these elements in a continuous interaction.

This paper aims to address the following questions:

1. What is a Secondary Market? And how does it work?

2. What are the types of Secondary Markets?
3. How to Trade on Exchanges and OTC Markets? And the procedures at
the Philippine Stock Exchange (PSE)?
 4. Who are the key participants in the Secondary Market?
5. What are the Advantages and Limitations of the Secondary Market?
6. What is the comparison of the Primary Market and the Secondary Market?

II. METHODOLOGY

With the use of the processes involved in the Secondary Research, varied
books, articles, blogs, and websites were consulted in the development of the
target topics of the paper.

The data regarding the Secondary Markets were derived from the articles
of Gupta (2024), Brigham & Houston (2008), Khan (2022), & Alfina, (2024). They
also discussed in their articles the types of Secondary Markets, which are the
Stock Exchanges, Over-the-Counter Markets, Auction Market, and the Dealer
Market.

Furthermore, the Trading Cycle in Secondary Market, was acquired from

the CFI Team (2023), it classified the trade on exchanges and OTC Markets. And
the Philippine Stock Exchange, Inc. (n.d), discussed how the investing procedure
works.

In addition, the Instruments Trade in the Secondary Market were derived

from the article Secondary Market: Full Form, Role & Importance of Gupta
(2024), it stated the Instruments Trade in the Secondary Market, which are the
Fixed Income Instrument, Variable Income Instruments, and the Hybrid
Instruments. In concurrence to the Key Participants in the Secondary Market,
Gupta (2024) also classified it, which are the Investors, Intermediaries, and other
participants.

For the data regarding the Advantages and Limitations of the Secondary
Market, and also the comparison of Primary Market and the Secondary Market,
were derived and discussed from the articles of Gupta (2024), the CFI Team
(2023), Khan (2022), Alfina (2024), & Merrill (2022).

III. RESULTS AND DISCUSSIONS

The Secondary Market

The secondary market allows investors to acquire and sell assets from
other investors. As stated by Gupta (2024), secondary markets, also known as
aftermarkets, play an important role in the global economy. They allow buyers
and sellers to trade current financial assets like stocks, bonds, and derivatives
more easily. The term secondary market refers to financial marketplaces where
securities, such as stocks and bonds, are purchased and sold after they have
been issued in the main market. Secondary market features enable investors to
purchase and sell securities between themselves without the intervention of the
originating business. Intermediaries, such as brokers and dealers, play an
important role in connecting buyers and sellers and smoothing the transaction
process. Secondary market trading procedures include auctions, in which buyers
and sellers compete to match their orders, and continuous trading, in which deals
are completed according to a set of established rules.

In the view of Brigham & Houston (2008), Secondary markets are those in
which outstanding, and previously issued securities are exchanged. The stock
market, which determines the pricing of businesses' stocks, is by far the most
active secondary market and the most essential one for financial managers.
Financial managers rely on stock market expertise to optimize their company’s
stock values, making it essential for business management.

According to Khan (2022), The secondary market is where investors profit.

It facilitates continuous daily trading and frequently allows access to lower-priced
shares than those accessible through direct purchases on exchanges or
over-the-counter marketplaces. In secondary markets, the fair price of shares is
determined by the supply and demand balance. Furthermore, secondary markets
help to ensure that assets are priced fairly. As a result, no agent may have an
influence on the share price.

When securities are exchanged on this platform, the original issuers do

not participate. Even asset values are decided purely on market performance
and are not impacted in any way by the issuing company's name. The phrase
"aftermarket" refers to when a stock or asset enters the market after its initial
acquisition or sale. These markets offer significant liquidity, allowing investors to
readily purchase and sell equities for cash. The aftermarket transactions reflect
how well a country's economy is doing. Rising stock prices indicate a strong
economy. On the contrary, falling prices indicate a weakening economy (Alfina,
2024).

It is vital to note that securities are exchanged on the secondary market

with no participation from the issuing firms. So, whereas the primary market is
where securities, bonds, and stocks are purchased, the secondary market is
where these securities may be freely swapped by both new and existing
investors (Merrill, 2022).

Types of Secondary Market

In the view of Gupta (2024), there are two types of Secondary Market, the
Stock Exchanges, and the Over-the-Counter (OTC) Markets.

A. Stock Exchanges

It allows the trading of stocks issued by public corporations. The

security dealers do not provide direct interaction between the vendor and
the customer. There are strict laws in place to ensure the safety and
security of commerce. Counterparty risk is nearly minimal in this situation
since the exchange acts as a guarantee. Exchanges have comparably
high transaction costs due to exchange fees and commissions. For
 example, consider the New York Stock Exchange (NYSE), the Bombay
Stock Exchange (BSE), and the London Stock Exchange (LSE).

Securities are exchanged in an exchange-traded market through a

centralized location (such as the NYSE, BSE, or the LSE). Buys and sales
are done through the exchange, with no direct touch between vendors and
buyers. There is no counterparty risk since the exchange is the guarantee.
Because of governmental control, exchange-traded markets are seen as a
secure environment in which investors may trade securities. However,
securities traded on an exchange-traded market have greater transaction
costs due to exchange fees and charges.

B. Over-the-Counter (OTC) Markets

These marketplaces are decentralized, with investors trading

amongst themselves. In such marketplaces, there is tremendous rivalry for
bigger volumes, resulting in price differences between sellers. Compared
to exchanges, the risk is larger because the vendor and buyer deal
one-on-one. The foreign exchange market is one example of an
over-the-counter market.

The prices of securities vary per firm. As a result, not every seller in
an OTC market will always give the greatest price. OTC markets are
susceptible to counterparty risk since the parties trading on them are
engaging with one another.

Trading Cycle in Secondary Market

A. Trade on Exchanges and OTC Markets

As stated by Merill (2022), there are ways on how to trade on

Exchanges and OTC Markets.
a.) Issuing (Primary). Companies issue securities to raise capital.
This primary issuance takes place through initial public offerings
(IPOs) or subsequent offers. Investors buy the freshly issued
securities directly from the corporation.
b.) Listing. After the insurance, securities may be listed on established
markets such as the New York Stock Exchange (NYSE) or the
Nasdaq. Listing requirements differ for each exchange, but often
include financial criteria, corporate governance norms, and
reporting duties. Once listed, assets become tradable on the
market, providing investors with liquidity.
c.) Order Placing. Investors use their brokerage accounts to place
purchases and sell orders for securities. Orders can be either
market orders (performed at the current market price) or limit orders
(executed at a specific price or better). Orders may also contain
additional instructions or consequences, such as stop-loss or
fill-or-kill orders.
d.) Order Matching. The exchange or over-the-counter market
electronically matches orders submitted by buyers and sellers. This
matching mechanism takes into account price, time priority, and
order type to ensure fair and efficient execution. Orders are
normally matched first-come, first-served, subject to pricing and
order type limits.
e.) Settlement. Following order matching, buyers and sellers
exchange assets and money to complete the transaction.
Settlement durations vary per market and can range from T+1 (one
business day after the trade date) to T+3. Settlement is the process
of transferring securities to the buyer's account and monies to the
seller's account, which is assisted by clearing and settlement
systems.
 B. Philippine Stock Exchange (PSE)

According to The Philippine Stock Exchange, Inc. (2020), it classified the

Investing Procedure of the Philippine Stock Exchange (PSE).

a.) Investing Procedure

1. Choose a Broker. Select a stockbroker. The PSE maintains a
comprehensive list of all its trading participants who are authorized
and qualified to trade securities for you. This list is also available on
the PSE's website, as well as in the yellow pages of the telephone
directory's Government and Business listings for stock and bond
brokers. Aside from representing you on the stock market, a
stockbroker may provide you with market reports/studies, timely
delivery of key papers, and financial advice. It is thus critical that
you trust your stockbroker and are pleased with their services.

2. Open an account. You will be needed to create an account,

complete a Customer Account Information Form, and provide
identity documents for verification. The brokerage will then appoint
a trader or agent to help you with purchasing or selling any listed
security. There are other stockbrokers who provide an online
trading platform that allows you to place orders yourself, but a
thorough grasp of how the stock market works is required. If you
prefer to work with a trader or agent, you may talk to him or her
about which stocks to purchase or sell.

3. Give your Order. Give the order to your trader, and then request
the confirmation receipt. Your buy and sell orders are sent to the
stockbroker's dealer for execution. In an automated system like
PSE, the order is entered through a trading terminal and
automatically matched. Confirmation of completed trades is made
 as quickly as possible - by phone, email, or online - and an official
confirmation or invoice is provided to you.

4. Pay before your settlement date. Pay on or before the settlement

date. The delivery or payment shall be made prior to the T+3
settlement date. Traditional stockbrokers normally settle
transactions three (3) working days after they occur. This means
that for transactions completed on Monday, for example, money
should be received by Thursday. Meanwhile, for online
stockbrokers, all transactions are settled on the transaction date.
Accounts are settled by the clearing house.

5. Receive your Proceeds/Shares. You will get the profits of the sale
of your stocks or evidence of ownership of the stocks you
purchased. If you want a physical certificate for the stocks you
purchased, you can notify your broker and pay the upliftment cost.
Stocks can be purchased through an initial public offering (IPO) or
the open market (sometimes called the secondary market). Shares
sold through IPOs are first offered to the public by the business
(primary market), and the proceeds go directly to the company.
Shares in listed or publicly traded corporations are only purchased
during trading hours. These shares have since been transferred
from one owner to another, and the revenues from the sales are
distributed to the shareholders rather than the firm.

b.) Trading Cycle

 Photo retrieved from The Philippine Stock Exchange, Inc.

All equities transactions, whether buying or selling, have a T+3

settlement time (trading day plus three working days). This implies that a
seller must be able to provide any stock certificates to his broker, and the
buyer must pay the transaction fee to his broker within three working days
after the trade. Historically, settlement was done manually over a 27-day
period. Transactions in scripless trading are settled on the third day after
 the trade date using the book-entry method (via the Philippine Central
Depository or PCD). Under this method, the investor can either hang on to
his certificate (uplift) or deposit it in PCD via his broker-participant
account.

Instruments Traded in the Secondary Market

As stated by Shreya Gupta (2024), the vital secondary market instruments

are Fixed Income Instrument, Variable Income Instrument, and the Hybrid
Instrument.

Fixed Income Instrument. Are the components of investments that

provide a fixed income in the form of periodic payments. For example,
Debentures and bonds. Corporate bonds are tradable financial instruments
issued by companies such as Apple and Amazon. Government bonds are
marketable debt instruments issued by governments, such as the United States
Treasury.

Variable Income Instrument. Investing in these assets does not

guarantee a steady, consistent income. Instead, rewards fluctuate depending on
market swings. For example, equities and derivatives. Futures contracts require
buyers and sellers to acquire or sell assets at a fixed price and time in the future.
Options are contracts that provide purchasers with the right but not the obligation
to purchase or sell assets at a fixed price and time in the future.

Hybrid Instrument. It is the instrument that provides both fixed and

variable returns on investments. For example, convertible debentures.

Key Participants in the Secondary Market

According to Gupta (2024), there are the aftermarkets participants of

Secondary Market.
 Investors. These are people or organizations who purchase and
sell securities in secondary markets for investing purposes.

Brokers. These secondary market actors act as middlemen,

facilitating exchanges between buyers and sellers in exchange for fees or
commissions.

Market Makers. These are third-party middlemen who purchase

and sell stocks on their own behalf to offer liquidity to secondary markets.

Regulators. These are government entities that supervise and

regulate secondary markets to ensure they are fair and efficient.

Advantages and Limitations of the Secondary Market

According to the analysis of Khan (2022), there are some advantages and
limitations to the Secondary Market.

Advantages. Aftermarkets simplify the process for investors to

liquidate their holdings and convert them into cash as needed, thereby
enhancing liquidity. This liquidity advantage extends to both short-term
needs and medium-term investment strategies. Moreover, the secondary
market serves as a valuable gauge of a nation's overall economic
well-being. By analyzing secondary market valuation data, investors gain
insights into the value of their securities holdings, aiding in financial
activities such as securing loans or calculating taxes. Selling shares on
the secondary market provides investors with a means to access the
funds they require, particularly beneficial for those with limited liquidity.
This accessibility ensures that valued securities are consistently available
for purchase. Additionally, securities play a pivotal role in expediting the
mobilization of funds, enabling investors to move their capital swiftly and
conveniently without compromising on safety or risk considerations. Within
 secondary markets, share prices are maintained at fair levels through the
dynamic interplay of supply and demand equilibrium.

Limitations. The volatility of securities' prices in the secondary

market introduces a significant element of unpredictability for investors,
potentially leading to unforeseen losses as prices fluctuate. Transactions
within the secondary market often entail considerable time investment, as
investors navigate through extensive documentation before finalizing
contracts. Investments made in secondary capital markets are exposed to
heightened external risks stemming from various factors, which can swiftly
alter investors' valuations. These risks are further compounded by the
potential impact of brokerage commissions, which are subject to taxation
upon completion of each deal. Careful consideration is imperative, as
commissions have the capacity to erode profit margins significantly and
thus warrant caution among investors.

Primary Market vs. Secondary Market: A Comparison

As indicated by the CFI Team (2023), Gupta (2024), Groww (n.d.), and
Khan (2022). There’s a comparison or differences between the Primary Market
and Secondary Market.

The Primary Market. The primary market is the one where

securities are generated. The main market is where corporations first offer
new stocks and bonds to investors. It is often done via an Initial Public
Offering (IPO). Small investors cannot acquire securities in the main
market because the issuing firm and its investment bankers prefer to sell
to large buyers who can purchase a large number of securities at once.
The main market offers finance to issuing firms.
 Photo retrieved from The CFI Team (2023).

The Secondary Market. This is the marketplace where securities

are exchanged. Investors trade securities independent of the issuing
businesses. Investors purchase and sell shares between themselves. The
secondary market does not give funding to issuing corporations, as they
are not participating in the transaction. The money obtained for a security
on the secondary market provides income for the investor selling the
securities.
 Photo Retrieved from The CFI Team (2023).

The primary market facilitates contact between the firm and its
investors, whereas the secondary market allows investors to purchase
and sell securities from other investors.

Photo retrieved from Khan (2022).

 IV. CONCLUSION

In conclusion, secondary financial markets contribute significantly to the

global financial system by providing liquidity, price discovery, and efficient capital
allocation. Additionally, if you intend to invest in the stock market, you may visit
small cases. It is a contemporary financial solution that provides expertly
selected ready-made portfolios for you to invest in.

The mere size of markets is enough to scare anyone, let alone how they
work independently of one another. However, there is no reason to allow the
complexity of each market to prevent you from investing. All investors need to do
is take a step back and learn about main and secondary markets. Breaking down
each market may serve as a solid basis for any investment portfolio, and
investors who perform their due diligence today will be glad they did years later.
When everything is said and done, the disagreement between primary and
secondary markets should be viewed as an educational experience rather than a
problem.

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