Secondary Securities Markets

          Secondary securities markets for securities facilitate the transfer of previously issued securities from existing investors to new investors. Security transaction or transfer typically take place on organized security exchanges or in the electronic over-the counter market. Individuals and other investor can actively by and sell existing securities in the secondary market. While these secondary markets investors may make gains or losses on their security investments, the issuer of the securities does not benefit (nor does it lose) from these activities. The secondary market for securities is typically divided into short-term (money) and long-term (capital) market categories.

Types of Financial Markets

          There are four types of financial markets--securities markets, mortgage markets, derivatives markets, and currency exchange markets. Most of us have some idea about the markets for securities. Securities Markets are physical locations or electronic forums where debt and equity securities are sold and traded. Debt securities are obligations to repay borrowed funds. Federal, state, and local governments can issue debt securities, while business corporations and financial institutions can issue both debt and equity securities. Equity securities are ownership rights in businesses and institutions. Corporations can raise funds either through a private placement that involves issuing new securities directly to specific investors or through a public offering that involves selling new securities to the general public.           There are primary and secondary markets for debt and equity securities. The initial offering of debt and equity securities to the public takes place in primary securities markets. Proceeds, after issuing costs, from the sale of new securities goes to the issuing business or government issuer. The primary markets is the only "markets" where the security issuer directly benefits (receive funds) from the sale of its securities.

Finance Firms

          Provide loans directly to consumers and businesses, as well as help borrowers obtain mortgage loans on real property. Some consumer-focused finance companies finance installment loan purchase of automobiles and other durable goods, while others provide small loans to individuals and households. Businesses that are unable to obtain financing from commercial banks often turn to finance companies that make commercial or business loans. Mortgage banking firms, sometimes just called mortgage companies, "originate" real state mortgages by bringing together borrowers and institutional investors. However, finance organizations usually don't perform financial intermediation roles since they obtain their own financing from other financial institutions rather than from individual savers.
          Few of today's financial institutions existed during the American colonial period. Only commercial banks and insurance companies (life and property) can be traced back prior to 1800. Savings banks S&Ls began developing during the early 1800s. Investment banking firms (and organized securities exchanges) also can be traced back to the first half of the 1800s. No new major financial intermediaries evolved during the last half of the nineteenth century. Credit unions, pension funds, mutual funds, and finance companies began during the early part of the twentieth century. Thus, throughout much of the 1900s and into the 21st century, emphasis has been on redefining and restructuring existing financial institutions rather than introducing new ones.

Investment Banking Firms

          Sell or market new securities issued by businesses to individual and institutional investors. Brokerage firms assist individual who want to purchase new securities issues or who want to sell previously purchased securities. Investment banking and brokerage activities are often combined in the same firms. However, unlike mutual funds, investment banking and brokerage firms are not actively involved in financial intermediation. Rather than gathering the savings of individuals, these firms obtain their financial capital to carry out their activities from their own resources or from other financial institutions.

Securities Firms

          Accepts and invest individual savings and also facilitate the safe and transfer of securities between investors. Investment companies sell shares in their firms to individuals and others and invest the pooled proceeds in corporate and government securities. One type of investment company, commonly called mutual funds because they can issue an unlimited number of their shares to their investors and use the pooled proceeds to purchase corporate and government securities. Mutual funds grow by investing the funds of their existing investor in securities that will pay or distribute cash and will appreciate in value. Successful mutual funds are able to attract more investor funds and, in turn, invest in more securities. Like depository institutions and contractual savings organizations, investment companies (particularly mutual funds) perform an important financial intermediation function.