Function
In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly; this is how stock exchanges originated, see History of the Stock Exchange). As a general rule, the greater the number of investors that participate in a given marketplace, and the greater the centralization of that marketplace, the more liquid the market.
Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the investor's desire not to tie up his or her money for a long period of time, in case the investor needs it to deal with unforeseen circumstances) with the capital user's preference to be able to use the capital for an extended period of time.
Accurate share price allocates scarce capital more efficiently when new projects are financed through a new primary market offering, but accuracy may also matter in the secondary market because: 1) price accuracy can reduce the agency costs of management, and make hostile takeover a less risky proposition and thus move capital into the hands of better managers, and 2) accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing.
Read more about this topic: Secondary Market
Famous quotes containing the word function:
“Nobody seriously questions the principle that it is the function of mass culture to maintain public morale, and certainly nobody in the mass audience objects to having his morale maintained.”
—Robert Warshow (1917–1955)
“The information links are like nerves that pervade and help to animate the human organism. The sensors and monitors are analogous to the human senses that put us in touch with the world. Data bases correspond to memory; the information processors perform the function of human reasoning and comprehension. Once the postmodern infrastructure is reasonably integrated, it will greatly exceed human intelligence in reach, acuity, capacity, and precision.”
—Albert Borgman, U.S. educator, author. Crossing the Postmodern Divide, ch. 4, University of Chicago Press (1992)
“Morality and its victim, the mother—what a terrible picture! Is there indeed anything more terrible, more criminal, than our glorified sacred function of motherhood?”
—Emma Goldman (1869–1940)