Secondary market - what is it and what is important to know about it?

Are you an investor considering where to put your money to work? Or perhaps you're looking for financing? If so, you’ve probably heard of the financial market, as well as primary and secondary markets. This article will focus on the secondary market: what it is, the reasons for participating in the secondary market, how investing works, the potential risks and returns, who the participants in the financial market are, and what secondary market strategies exist.

What is the Secondary Market?

Let’s start with the concept. Do you know what the secondary market is? It’s the market where securities and other investments are traded. For example, Company X sells some of its shares, which are bought by Company Y, which may then either split or sell all of those shares to another person or company, P. Company Y would be considered as operating in the secondary market. In other words, P would be purchasing shares from the secondary market. The secondary market allows investors to exit a deal earlier and recover part or all of their investment ahead of the originally planned investment term. Another example is peer-to-peer lending platforms. A company seeking funding turns to a lending platform, which then looks for investors willing to finance the loan. In the primary market, those who want to borrow and those who want to lend operate; in the secondary market, those who want to sell their claims and those who want to acquire them operate. This provides greater liquidity for investments because, with a secondary market, you can sell your investment at any time if a buyer is available. It also offers the opportunity to acquire investments at a discount, as most sellers wish to sell quickly and offer various discounts.

Reasons for Buying and Selling in the Secondary Market

There are many advantages or reasons for buying or selling in the secondary market. This financial market is appealing both to sellers, who wish to quickly rid themselves of obligations, liquidate their portfolios sooner, remove what they consider unprofitable investments to reinvest elsewhere, or sell investments at a higher price, and to buyers, who seek safe and proven investments, the opportunity to buy them cheaper, and potentially earn a significant profit. To make it easier to understand the reasons for buying and selling in the secondary market, we’ve provided a table below:

Reasons for Selling

Desire to get rid of existing obligations
Aim to liquidate the portfolio early
Want to remove investments from the portfolio that other investors might find more profitable than the sellers do
Intend to sell investments at a higher price

Reasons for Buying

Opportunity to acquire safe, non-delinquent, and already established investments at a lower price
Inability to find the desired investment object in the primary market
Opportunity to review the solvency history of a specific potential investment
Ability to buy an investment at a lower price than its original value in the primary market
Expectation of higher returns by purchasing delinquent credits at a significant discount

How Does Investing in the Secondary Market Work?

In the secondary market, legal or natural persons trade previously acquired securities, so you don’t need to look for, create, or manage new deals to invest. The securities sold in the secondary market may be either more expensive or cheaper than when they were issued. The price at which securities are sold depends on their performance.

Of course, this depends on the financial instruments, but investing in the secondary crowdfunding market does not necessarily require a large amount of money. Investing in the secondary market allows for quicker and shorter-term investments. Financial market participants can also diversify, i.e., invest in different assets simultaneously to reduce the risk of losses. The secondary market is particularly favorable for portfolio management strategies due to the flexibility it offers investors.

Who Can Participate in the Secondary Financial Market?

Typically, three participants operate in the secondary market: those seeking financing, those seeking financiers, and financiers. Anyone with shares, bonds, and other securities, real estate, or other assets who seeks investment can become one of those looking for financing or trying to sell their securities, ongoing projects, shares, etc. Other participants in the financial market include financial institutions: banks, credit unions, joint-stock or limited liability companies with a payment institution license, and others. The third group of participants is investors. There’s no strict definition of who can become an investor in the secondary market. Each institution has its own set of requirements. For example, on profitus.lt, even those under 18 years old can become investors by submitting the required documents.

Risks and Returns in the Secondary Market

The risk of investments in the secondary market, compared to the primary market, does not differ significantly since investments in both markets are similar—an investment must have been in the primary market before it reaches the secondary market.

However, the levels of risk and return can vary across different markets.

Secondary Stock Market: Here, previously issued stocks are resold. Investments in stocks have always been riskier but somewhat more profitable.
Secondary Real Estate Market: This includes the purchase, sale, lease, exchange, 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: This is the overall resale of securities already in circulation. Investing in securities in the secondary market is advantageous due to the higher liquidity of the securities.
Secondary Housing Market: This is a very convenient and secure way to acquire investment property, which can become an excellent source of passive income.

Secondary Market Strategies

In the secondary market, you can invest using various strategies and in different market segments. For instance, you can choose to invest in the secondary stock market, the secondary real estate market, or take a different approach and invest in projects with insolvent borrowers, invest in projects with chronically late borrowers, or buy projects that will start paying interest the next day.

Insolvent Borrower Projects: These are projects where borrowers have become insolvent due to certain difficulties. By investing in such projects, it is hoped that once the borrowers overcome their difficulties, they will repay the loans, allowing you to earn more since these projects pay higher annual interest.
Chronically Late Borrower Projects: Such projects are often available at a lower price. If you purchase such a loan and the borrower makes a payment, you will receive not only interest but also late fees and the option to sell the loan, which is being repaid on time, at cost, and consider the discount as profit.
Buying Projects with a Payment Due Tomorrow: This means that if you purchase a debt whose payment is due the next day, you will immediately earn the profit for the entire month, even though you’ve only lent the money for one day.

Profitus Activity in the Secondary Market

The secondary market on the Profitus crowdfunding platform launched back in 2021. Since then, the Profitus secondary market has been very active, offering the opportunity to sell your investments by transferring claims to other investors before the project is completed. What does this mean? Imagine: a 12-month project is announced on the platform, and you decide to invest. After 4 months, an unforeseen event occurs, and you need the money. Normally, you would have to wait until the investment term ends, but with the secondary market, you can sell this investment to other investors, setting a price that works for you. This type of investment in the secondary market is safe and truly convenient. Currently, the secondary market on the Profitus platform is temporarily suspended due to the implementation of a new crowdfunding regulation, which required updating this functionality to comply with the new European directive. When the secondary market becomes active again on the platform, we will inform all investors via email and on the platform itself.