Secondary Market

When a company sells shares for the first time, the buyers' money flows directly to it. This initial sale is called the primary market. After that, the shares belong to the buyers, who are free to resell them. This resale between investors is the secondary market. The company itself is not involved and earns nothing from it. It’s basically like with a car: the manufacturer earns money on the new car, and afterward the car changes hands between private individuals without any money reaching the manufacturer.

Why no one would invest without the option to resell

The secondary market provides a feature that is crucial for investing: you can get back out. Experts call this liquidity. Anyone who buys a stock knows they can sell it to someone else tomorrow or in five years. Without this assurance, people would have to lock up their money for an indefinite period. Most people simply wouldn’t invest at all in that case.

That’s exactly why the secondary market is also important for companies, even though they earn no money there. A company whose shares are easily tradable finds it easier to attract new investors the next time around. If a functioning secondary market is missing, investors demand a discount for the risk of being stuck. The company then receives less money for the same shares.

The secondary market fulfills a second function as well: it continuously establishes a price. Every price is a summary of what thousands of buyers and sellers think about a company’s future. That’s why a falling share price is considered a warning sign, even though it doesn’t cost the company a single cent.

How buyers and sellers find each other

On a stock exchange, all buy and sell orders come together in an electronic order book. Every order contains a quantity and a price. When a buy offer and a sell offer match, the trade is executed automatically. The price of the most recently completed trade is the current price. This can happen millions of times a day.

To ensure someone is available even when no matching counterpart currently exists, there are market makers. These are traders who continuously quote prices for buying and selling. They earn money on the difference between the two prices, the spread. For heavily traded stocks, this gap is tiny; for rarely traded securities, it’s noticeably larger.

Not every secondary market is a stock exchange. Bonds are usually traded directly between banks and large investors, over the counter. And shares in companies not yet listed on an exchange change hands through individual negotiations. Such markets are slower, and prices are less transparent.

From IPOs to ticket resales

In the news, you’ll usually encounter this term in connection with an IPO. It might say, for example, that a security has risen above its issue price on the secondary market. What this means is: investors are paying each other more than the company itself received in the initial sale. A common misconception is the assumption that this price gain flows money into the company’s coffers. It does not.

The term comes up particularly often with startups in the tech and AI space. Companies such as major AI labs remain private for a long time, but their employees hold shares. Through secondary transactions, they can sell part of their holdings to funds without the company going public. The valuations that show up in headlines often originate from such deals.

The principle applies far beyond securities. The resale of concert tickets, trading in used game consoles, or trading in CO2 certificates all work according to the same logic. It’s always about something that has already been issued, and a price that is newly determined by supply and demand.