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Unit 6: Secondary Market

rise in share prices in future buys shares at lower prices in the present and disposes them Notes
off in future. This results in gradual rise in prices and avoids violent fluctuations in share
prices. Thus, regular transactions in securities prevent sharp movement in prices unless
warranted by economic and political developments in the country and abroad.
Stockbrokers render useful services in equalising prices of securities of different markets.
They make heavy buying in the market where share prices are ruling low and thereby
increase pressure of demand of securities which would in consequence raise share prices.
Where share prices are high, the stockbrokers tend to depress the rise by sale of securities
substantially.
3. Regular valuation of securities: Another redeeming function of the secondary market is
to provide mechanism to evaluate securities properly. For proper valuation of securities,
the market provides such an economic machinery which could produce prices of securities
as close as possible to investment value based on present and future income yielding
prospects of various enterprises capitalised at notional rate of interest, i.e., the rate that
will prevail if and when all the liquid savings are employed into productive avenues. This
can be achieved by intelligent anticipation of future income yielding prospects of various
enterprises and notional rate of interest. A well-developed secondary market disseminates
full information about listed companies to attract a large number of informed buyers and
sellers from all walks of life and to arouse keen competition among them resulting in the
establishment of fairest possible price.
4. To provide safety in dealings: A well-organised and regulated secondary market ensures
a greater measure of safety and fair dealings to the average investors because transactions
are made publicly under well-defined rules, regulations and bylaws of the exchange. For
any malpractice, or for not observing the exchange rules, the member broker is severely
dealt with by the stock exchange. A listed company is required to make a continuous
disclosure of all material information for the benefits of the investors.
5. To ensure wide ownership of securities: A secondary market ensures wider distribution of
securities. If a company's securities are listed in different stock markets of the country, its
securities will be bought and sold by persons spread across the country and ownership of
securities is widely diffused. Broad ownership also safeguards the corporate sector from
government interference and protects genuine security markets from dominance by large
institutions and government bodies.

6.2 Importance of Secondary Market

In view of the above functions, the secondary market plays crucial role in economic and industrial
development of a country through promoting capital formation and efficient allocation of
capital. Secondary market promotes capital formation by assisting in the effective mobilisation
of savings and their canalisation into appropriate avenue of investment. It does by providing an
organized market in diverse types of securities to suit the varying notions and whims of a vast
mass of savers about liquidity, profitability and risk element in their investments. The opportunity
of constant evaluation of returns on one's investment compared to others, the liquidity that is
imported to investment in fixed capital and price continuity that it ensures, instill confidence in
the minds of savers. On the other hand, by creating conditions which reasonably ensure
availability of financial resources for creating real capital, whether in private or public sector,
they give impetus to development.
A secondary market increases economic efficiency. An organised exchange helps allocate capital
more efficiently by establishing fair prices for securities and by minimising the costs of buying
and selling them. A secondary market also helps in directing flow of savings into promising

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