What Are Secondary and Primary Markets?
Primary and secondary markets are two sides of the investing coin. On one side, you buy your investment “first-hand”, on the other, you buy from another investor. While many people trade on primary markets only, you can earn big profits on secondary markets, too. In fact, many peer-to-peer lending platforms offer a great secondary market where you can hoover up interest from investors who want to end their term early.
Once you delve a bit into investment you’ll start to run into the terms “primary” and “secondary” market a lot. And maybe you’re a bit confused.
How come the stock market is considered a secondary market, but a secondary market for P2P lending is for selling old loans to investors? How do you buy stocks on the primary market? Why does it matter?
We’re going to break down the difference between the two for you today.
What is a Primary Market?
The primary market is also referred to as the new issues market. Here, transactions are made directly between the issuer of a security and the buyer.
One example of a trade on the primary market is an Initial Public Offering (IPO), when a private company decides to sell its stock to the general public for the first time.
Generally IPOs aren’t available to ordinary investors in the US, usually you must be accredited to start.
On a P2P lending platform’s primary market, a basic peer-to-peer loan agreement is exchanged between a borrower and a lender.
Through this agreement, the lender is entitled to repayment with interest when the loan matures. The borrower is considered the issuer of the security so the initial transaction is the primary one.
What is a Secondary Market?
Securities have value outside of just the primary market.
In secondary markets, investors sell primary market securities to new investors, at which point they become secondary market securities. They are not sold by the original issuer, but the security is still redeemable from the original issuer.
Here’s an interesting fact: Most stocks you buy through major stock exchanges like the NYSE are actually considered secondary market securities, not primary.
Here’s why: When you buy stock you usually buy the security from someone who purchased the stock during an IPO. However, that share entitles you to the same amount of money because the company allows people to buy and sell their shares outside of the IPO.
A share of Apple bought from someone who bought it at IPO is still worth the same percentage of the company.
What are peer-to-peer lending secondary markets?
Peer-to-peer lending secondary markets allow you to buy and sell loans that are already financed after repayments have started. When you buy a loan on a secondary market, you are buying the right to receive interest from a borrower in place of the original lender.
On lending platforms with unsecured loans, secondary markets can be a great way for the platform to recover a small portion of lost funds in the case of borrower default.
Platforms will sell defaulted loans to a debt collector for a fraction of the original cost. The debt collecting agency then reaches out to defaulted borrowers and helps them come up with a repayment plan for the rest of the interest.
How MyConstant’s P2P secondary market works
When buying an investment in our secondary market, you receive most of the interest on a loan without having to invest for the entire term.
On the seller side, selling your loan to other investors to end your investment term early while still earning on elapsed term time.
How it works:
- Selling your loan on the secondary market
When you decide to sell your investment on the MyConstant secondary market, your buyer must pay you back your principal. You will receive 2% APR from the borrower for the time for which you’ve already invested.
- Buying a loan on the secondary market
When you buy a loan, you’ll need to pay the full principal amount back to the investor. After this, you’ll receive the full interest on the loan minus 2% APR on elapsed term time. That means you’re receiving APR even for time you didn’t put into the loan.
As you may guess this makes our secondary market loans very high demand. Look at our blog on our secondary market for more information on how we select who gets secondary loans.
You can also sell a secondary market order in the same way you would a primary market order – there’s no limit on how many times a secondary market loan can change hands before it matures.
Secondary markets make online lending better at MyConstant
As you might imagine, secondary market offers are popular. They make investing easy, unlocking people from fixed terms while giving others a chance to reap higher rewards.
Our secondary market is so popular that we use a raffle system to determine buying priority for secondary investments. This makes it super easy to back out of loans if you need to get your cash back in a hurry.
It’s just one of the many services that online lending platforms offer that traditional lenders can’t – on top of rates between 4-7% on fully-backed loans – and another reason why P2P lending is taking the world by storm.
Sign up for a free account with MyConstant today to start earning on our primary and secondary market. And check out our frequently-updated blog for more info on financial topics.
Share this article