The secondary equity markets provide marketability and share valuation. Investors or traders who purchase shares from the issuing company in the primary market may not desire to own them forever. The secondary market permits the shareholders to reduce the ownership of unwanted shares and lets the purchasers to buy the stock.
The secondary market consists of brokers who represent the public buyers and sellers. There are two kinds of orders −
● Market order − A market order is traded at the best price available in the market, which is the market price.
● Limit order − A limit order is held in a limit order book until the desired price is obtained.
There are many different designs for secondary markets. A secondary market is structured as a dealer market or an agency market.
● In a dealer market, the broker takes the trade through the dealer. Public traders do not directly trade with one another in a dealer market. The over-the-counter (OTC) market is a dealer market.
● In an agency market, the broker gets client’s orders via an agent.
Not all stock market systems provide continuous trading. For example, the Paris Bourse was traditionally a call market where an agent gathers a batch of orders that are periodically executed throughout the trading day. The major disadvantage of a call market is that the traders do not know the bid and ask quotations prior to the call.
Crowd trading is a form of non-continuous trade. In crowd trading, in a trading ring, an agent periodically announces the issue. The traders then announce their bid and ask prices, and look for counterparts to a trade. Unlike a call market which has a common price for all trades, several trades may occur at different prices.