Series 7: Chapter Seventeen

Chapter Seventeen

Trading in the Secondary Market

Once an issuer offers and sells its securities in the primary market, the securities begin trading in the secondary market among parties that are not the issuer. On the secondary market, investors trade the securities among themselves, and the proceeds of a sale go to the shareholder, not the issuer of the security. The secondary market in the United States can be divided into four markets. While you should know the distinctions among these markets for your exam, keep in mind that the differences have blurred due to technological advances in the trading.

First market—auction market. In an auction market, investors buy and sell securities through announced bid and ask prices at a physical location called an exchange. Brokers gather around a trading post where a designated market maker acts as auctioneer and allows supply and demand to determine the price of the security. The auction market is also called the first market.

Second market—negotiated market. A negotiated market is one in which buyers and sellers post their bid and ask prices on a computerized network with any of several market makers. Unlike the auction market, wh