Legal Definitions - secondary trading

Secondary trading refers to the buying and selling of financial securities, such as stocks, bonds, or mutual fund shares, that have already been issued by a company or government. In secondary trading, the transaction occurs between investors, meaning the original issuer of the security does not receive any proceeds from the sale. This type of trading provides liquidity to investors, allowing them to buy or sell their holdings after the initial offering.

Here are some examples to illustrate secondary trading:

• Imagine an individual, Sarah, decides to purchase shares of a well-established automotive company, "Global Motors," through her online brokerage account. She places an order to buy 100 shares, and her broker executes the trade on a major stock exchange. Sarah is buying these shares from another investor who previously owned them, not directly from Global Motors itself. This is secondary trading because Global Motors, the original issuer of the shares, does not receive any money from Sarah's purchase; the funds are exchanged between Sarah and the previous shareholder.

• A large university endowment fund holds a significant portfolio of government bonds. After several years, the fund managers decide to rebalance their portfolio and sell a portion of their U.S. Treasury bonds to another institutional investor, a large insurance company. The U.S. Treasury initially issued these bonds years ago to raise capital. This transaction is an example of secondary trading because the sale is occurring between two investors (the endowment fund and the insurance company), and the U.S. government does not receive any new funds from this exchange.

• Consider a person named David who owns shares in a publicly traded exchange-traded fund (ETF) that tracks the technology sector. He decides to sell his ETF shares to free up capital for a down payment on a house. He places a sell order with his broker, and another investor, Emily, who is looking to invest in technology, purchases those shares. This is secondary trading because David is selling his existing shares to Emily, and the company that manages the ETF does not receive any money from this specific transaction between David and Emily.