Monday, 2 May 2011

Importance of Secondary Markets to Primary Markets

Corporations and governments can raise money in the primary markets as lower cost when their securities will trade in liquid secondary markets. In a liquid market, traders can buy or sell with low transaction costs and small price concesions when they want to trade. Buyers value liquidity because they may need to sell their securities to meet liquidity needs. Investors thus will pay more for securities that they can easily sell than for those that they cannot easily sell. Higher prices translate into lower costs of capital for the issuers. ( Equity and Fixed Income, 2011, CFA Institute)