Secondary Market

Most trading on stock exchanges is secondary market trading. When you buy shares of a listed company through a broker, you are almost always buying them from another investor, not from the company. The company receives no money from that trade.

The secondary market is essential even though issuers do not receive money from it. It provides liquidity: investors know they can sell their securities later if they need cash, which makes them more willing to buy in the first place. It also provides price discovery, as constant trading shows what investors think securities are worth.

For example, a company might sell shares at 20 in its IPO. Over the following years, those shares might trade between investors on the stock exchange at prices from 15 to 60, depending on how the company performs and how investors view its prospects.

The prices set in the secondary market also matter to companies. A higher share price makes it easier and cheaper to raise new money in the primary market and can be used to pay for acquisitions.