To get a full understanding of how securities like stocks and bonds are traded, investors should be aware of the primary and secondary market – how they work and how they differ. First of all, there is a necessity to explain in general, starting from the very beginning - the stock market.
It is essential to understand the distinction between the secondary market and the primary market. When a company issues stock or bonds for the first time and sells those securities directly to investors, that transaction occurs on the primary market. Some of the most common and well-publicized primary market transactions are IPOs or initial public offerings. During an IPO, a primary market transaction occurs between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the capital, after accounting for the bank's administrative fees.
If these initial investors later decide to sell their stake in the company, they can do so on the secondary market.
The secondary market is where investors buy and sell securities they already own. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.
Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Transactions that occur on the secondary market are termed secondary simply because they are one step removed from the operation that originally created the securities in question.
The secondary market in the P2P Alternative Investment platform is a marketplace that allows investors to buy and sell already funded loans after the repayment period has begun. This will enable investors to exit loans early or start investing instantly instead of waiting for new investments to be available for funding. If you are looking to get out of a P2P loan and do not want to wait for the loan to run out, your primary option is to make use of a P2P secondary market.
However, since not all platforms offer secondary markets for loans, always make sure to check what features the platform offers before you start investing – mainly if you know you might be in need of exiting the investment early. Instead of providing a P2P secondary market, some platforms offer investors the option of selling the loan back to the platform company at a discount, but especially a lot of newly founded platforms do not have any prospects of exiting the investment early.
Recently, FAST INVEST has introduced SECONDARY MARKET on the platform for the efficiency and convenience of our investors. Investors have an opportunity to buy BACKUP loans with discounts or to sell with premiums. All the BACKUP loans are marked with the signature icon.
Most platforms allow you to set the price when selling the outstanding loan or part of it. The "price" of the loan is often described as the outstanding loan discount, allowing you to sell it for less than the outstanding debt.
An example could be the following. You are interested in selling one of your outstanding loans worth €1,000, giving you the following possibilities:
You could try to sell the investment for €1,000 and get your money back.
You could try to sell the loan fast by giving a discount of, e.g., 2%, resulting in a price of €980 and a €20 loss plus fees.
Platforms allowing discounts on their secondary market often put a cap on the maximum and minimum percentage you are allowed to sell and buy loans at.
What if I want to stop investing? If at any time you decide to stop investing in a selected loan before the maturity date, you can sell that investment to other investors of FAST INVEST.
Is there a Secondary Market available? There is a possibility to sell the loans on the Secondary Market. If you want to sell your investment, you can log into your FAST INVEST account, click on the Investments section, select the loan you would like to sell, possibly apply the discount, and click “sell.” Your full investment balance in the chosen loan will be published on the FAST INVEST marketplace, and as soon as another investor buys it, you will receive your funds equal to the sale price of the investment. By the way, once you add a loan to the Secondary Market, you are unable to cancel the sale.
What is a Backup loan? If you are looking to sell your loan on the FAST INVEST platform and do not want to wait for the loan to run out, your first option is to make use of the Secondary Market. FAST INVEST integrates Secondary Market into our Primary Market, aka Loans List. Loans listed on the Secondary Market named Backup Loans, and you can find it highlighted in a pale blue and marked by the blueish symbol [ICON].
Can I sell the loan with a discount? When you decide to sell your investment to other FAST INVEST investors, you may apply a discount to it or sell it for face value. For example: If you sell your €100 investment for its face value – 0% discount, in this case, you will receive €100 from the buyer of the investment. If you apply a discount of 10%, you will receive €90 for selling €100 investment to the buyer.
Does AUTO INVEST invest in loans on the Secondary Market? AUTO INVEST does invest in the loans published on the Secondary Market as long as the setting of the AUTO INVEST portfolio matches the characteristics of the loan published on the Secondary Market. AUTO INVEST will invest in the discounted loans if the price of the loan falls within the minimum and maximum investments set in the AUTO INVEST portfolio.
How do I find the Secondary Market? With FAST INVEST, the loan list contains the loans that are sold by the lenders, as well as the other investors – primary and Secondary Market, which are both within the same loan list.
How is the interest split between the seller and the buyer of investment on the Secondary Market? The seller of the investment earns the interest amount proportional to the number of days he/she held the investment in the portfolio until the loan was sold. The interest earned between the placement of the investment on the Secondary Market and the purchase of it is paid to the seller of the loan. The buyer of the loan also earns the interest amount relevant to the number of days he/she held the investment since the purchase of it.
To sum up the advantages of the SECONDARY MARKET, we can highlight the following aspects:
TRANSPARENCY – in addition to the fact that traditional P2P providers don't typically want to visibly show secondary prices that are generally lower than the original investment.
LIQUIDITY – it's one thing to have a secondary market, but having a centralized place where investors can seamlessly buy or sell securities will undoubtedly increase participation directly through the depth of engagement.
INVENTORY – a centralized marketplace will encourage more participants and therefore increase the number of investments. Which is suitable for both buyers and sellers.
PRICING – increased transparency, liquidity, participation, and access to more investments will naturally lead to more excellent supply and demand and, therefore, competitive pricing.
EFFICIENCY – a centralized marketplace will allow buyers and sellers to be matched more efficiently and quickly.