WHAT IS THE SECONDARY MARKET?

The secondary market can best be understood in comparison to the primary market, which is where securities are first offered and sold for the issuing companies by investment bankers.  The secondary market is wherever bonds and other securities are bought and sold following their original sale.  This trading may take place at an organized exchange -- for example, the New York Stock Exchange -- or over the counter through a telephone and computer network.

The corporation or government unit that issued the bonds plays no role in trading on the secondary market.  Nor does it receive any profits from these transactions.  The investors who sell the bonds receive the proceeds, minus any fees or commissions.

A number of financial professionals implement transactions on the secondary market.  A broker usually receives a commission to serve as an intermediary between a seller and a buyer.   A dealer is an individual or firm that takes the role of principal in a transaction, buying or selling bonds or other securities on behalf of its own accounts and bearing the risk associated with this trading.  A broker-dealer describes many firms, which act sometimes as brokers and other times as dealers for their own accounts.  An investor who buys bonds from a broker-dealer purchases the bonds from the firm's inventory and receives written documentation of this fact. A specialist focuses on buying and selling one or more types of bonds and stocks for others and on maintaining balance in the securities exchanges.  A specialist may trade to even out supply and demand, and prevent wide fluctuations in securities prices.  A market maker performs the same buying-and-selling function for the over-the-counter market.

Exactly how does the over-the-counter bond market work? Let's find out next.