The primary objectives of a secondary market are to provide marketability to existing securities and to facilitate the acquisition of capital by corporate enterprises. In order to accomplish these objectives, the secondary market performs the following functions:
1. To provide for a regular market: The secondary market provides for a ready and continuous market where those desiring to deal in securities assemble to buy and sell securities
during the business hour. This enables investors to liquidate their investments quickly and with the least possible loss. High marketability of securities enhances their value and
facilitates the use of these securities as collateral for loan.
2. To provide stability in prices of securities: Through the mechanism of regular purchase and sale of securities, the secondary market ensures continuity and stability in share price which is an essential requirement of liquidity. Bulls, bears and stock brokers operating in
the market deal in securities with extreme the expected changes in security prices and buy or sell securities accordingly to take price advantage. For instance, speculators expecting 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
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.