Secondary Market – What Is It and What Is Important to Know About It?

Are you an investor wondering where you could deploy your money? Or perhaps you are looking for investors? If so, you have probably heard of the financial market, the primary market, and the secondary market. This article discusses the secondary market: what it is, the reasons for participating in it, how investing works, the potential risks and returns, who the financial market participants are, and the strategies for the secondary market.

What is the secondary market?

The secondary market is a platform's programmed functionality that allows investors to recover their investment early by transferring it to another investor. Purchasing or selling investments on the secondary market follows the same investment conditions as for other investors investing in the primary market. For example, a company seeking funding approaches a borrowing platform with the goal of borrowing for 12 months. You invest and lend your funds to this project, but after 6 months, due to unforeseen circumstances, you need the money. Since you invested in a 12-month project, you would typically get your funds back after half a year. However, you can transfer your commitment to another person on the secondary market, thus recovering your initial investment more quickly.

Reasons for buying and selling in the secondary market

There are many advantages and reasons for buying or selling in the secondary market. This financial market is in demand for sellers wanting to quickly get rid of commitments, cash out their portfolio earlier, remove investments they deem unprofitable, and use the obtained money elsewhere or sell investments at a higher price. It is also in demand for buyers looking for safe and proven investments, opportunities to buy them cheaper, and potentially earn significant returns. To better understand the reasons for buying and selling in the secondary market, we present them in a separate table.

Reasons for selling:

Want to get rid of existing commitments
Desire to cash out the portfolio earlier
Want to remove investments from the portfolio that other investors find more profitable than the sellers
Aim to sell investments at a higher price

Reasons for buying:

Opportunity to buy safe, non-delayed, and already established investments at a lower price
Unable to find the desired investment object in the primary market
Opportunity to review the credit history of a specific potential investment
Opportunity to buy an investment cheaper than its amount was stated in the primary market
Expect higher profits by purchasing delayed credits at a significant discount

How does investing in the secondary market work?

In the secondary market, legal or natural persons trade previously acquired investments. Thus, to invest, you do not need to search, create, and manage new deals. Investments sold in the secondary market can be more expensive or cheaper than they were at the time of financing because the price is set by the seller. However, the buyer must agree to this price at the time of purchase.

To invest in the secondary market, you do not need a large sum. For example, in Lithuania, the secondary real estate market is very active, where financing platforms look for people who can safely invest small amounts in projects guaranteed by specific real estate. Investing in the secondary market is less risky, and you can invest faster and for a shorter period. Financial market participants can also diversify, i.e., invest in different assets simultaneously to reduce the risk of loss. The secondary market is very favorable for portfolio management strategies.

Who can participate in the secondary financial market?

There are usually three financial market participants in the secondary market: those seeking financing, those seeking financiers, and financiers. Those seeking financing or aiming to sell their securities, projects, shares, etc., can be anyone with shares, bonds, and other securities, real estate, or other assets looking for investments. Other financial market participants include financial institutions: banks, unions, licensed payment institutions, joint-stock or closed joint-stock companies, and others. The third financial market participants are investors. There is no exact definition of who can become investors in the secondary market. Each institution has its own requirements. For example, at profitus.lt, even those under 18 can become investors by submitting the necessary documents.

Risk and return aspects in the secondary market

We mentioned that the investment risk in the secondary market is lower compared to the primary market. This is because banks, credit unions, peer-to-peer lending platforms, and other physical or legal persons seeking investors simply choose to work with projects that are beneficial, safe, profitable, and have guarantees. However, the levels of returns and risks can vary in different markets.

Secondary stock market – previously issued stocks are resold. Investments in stocks have always been riskier but somewhat more profitable.

Secondary real estate market – includes buying, selling, renting, exchanging, mortgage, and other resale transactions. Investing in real estate in the secondary market is safer and more profitable through active lending and borrowing platforms.

Secondary securities market – the entirety of resale of securities in circulation. Investing in securities in the secondary market is advantageous due to the greater liquidity of securities.

Secondary housing market – a truly convenient and reliable way to acquire investment property, which can become an excellent source of passive income.

Secondary market strategies

You can invest in the secondary market by choosing different strategies and different parts of the markets. For example, you can choose to invest in the secondary stock market, the secondary real estate market, or not be restricted to a certain type and choose a slightly different strategy: invest in defaulting debtor projects, invest in projects of consistently late debtors, buy projects for which interest will be paid the next day.

Defaulting debtor projects – projects where debtors have become insolvent due to certain difficulties. By investing in such projects, it is hoped that once the difficulties are overcome, the debtors will repay the debts and thus you can earn.

Consistently late debtor projects – such projects can often be purchased at a lower price. By purchasing such a loan and waiting for the debtor's payment, you will receive not only interest but also late fees and the opportunity to sell the timely paid loan at cost, and consider the discount as profit.

Buy projects that will be paid tomorrow – means that by buying a debt whose installment will be paid the next day, you will immediately earn a profit for the entire month, even though you have lent the money only for one day.

Profitus activity in the secondary market

The secondary market on the crowdfunding platform "Profitus" started back in 2021. Investors used it very actively. Due to the new regulation, the secondary market was temporarily suspended because the new license defined the functioning of the secondary market and improvements were needed to meet the new license requirements. Such investment in the secondary market allows investors to choose the most acceptable investment strategy, recover investments earlier, and have even more control over their investment portfolio.