Secondary Market Trading

Once a company has gone through its IPO, investors buy and sell issued shares through intermediaries in the secondary market, which includes the traditional and electronic exchanges, as well as the over-the-counter (OTC) market, where transactions occur over the phone or on a computer. Companies with shares trading in the secondary market are required to regularly release reports describing their financial status, and any other pertinent information for the benefit of potential investors.

Many investors buy stocks in the secondary market with the goal of realizing a capital gain. Investors also tend to appreciate the market's liquidity. Heavy trading volume typically makes the market very liquid, so you can be fairly certain that if you want to sell your shares, there will likely be another investor willing to buy them right away, though the price you're paid may be less than you had hoped. Because you trade through intermediaries, you're unlikely to know who bought your shares or where your shares came from.

Traditional trading takes place on an exchange floor in an auction or open outcry where brokers buy and sell securities through professional specialists. Each stock is traded through just one specialist.

Secondary Market Types

The NASDAQ Stock Market became the world's first electronic market in 1971. Here, trades are executed directly between market makers using computers, often with several offering to buy and sell specific numbers of shares of the same stock at different prices. There's no trading floor and no specialists. On some electronic trading platforms, orders are matched automatically and anonymously.

Hybrid markets are a combination of traditional auction-style and electronic markets. Although the New York Stock Exchange (NYSE) had automated certain processes for years, the SEC granted the exchange permission to become a true hybrid market in 2006. While floor trading does exist, floor brokers and specialists use technology to trade, and increasing numbers of trades are executed electronically without going to the floor. Hybrid markets can handle a larger volume of trading than traditional ones and have the option and flexibility of acting as either a traditional or electronic market.

Electronic Communications Networks (ECNs) are virtual trading platforms that allow stocks to be traded electronically without a specialist or market maker.

ECN trading can be faster and less expensive than trading in a traditional market, and allows institutional and individual investors to trade anonymously. In addition, ECNs have helped individual investors gain easier access to after-hours trading, which had been done primarily by high net worth investors and institutions in the past.

Exchange Eligibility

Companies must meet requirements set by individual exchanges for market capitalization, number of outstanding shares, average trading volume, and a number of other factors to be eligible for listing on that market. Requirements vary from exchange to exchange, as do the fees associated with listing.

Small and new companies that are not eligible to be listed on NASDAQ or in a traditional market are bought and sold over the counter (OTC). Such transactions take place over the phone or on a computer. OTC stocks are generally inexpensive but are often thinly, or infrequently, traded. There's generally much less information available about OTC stocks than about listed stocks.

The NYSE

New York became the epicenter of the financial world in the United States with the creation of the New York Stock Exchange (NYSE) in 1817, though the first stock market actually opened in Philadelphia in 1790.