Sunday, April 19, 2009

providing risk-sharing,liquidity,and information services (2)

Secondary markets also are important for global foreign exchange transaction . Regardless of the type of instrument being traded , the buyer of the instrument in a secondary market pays money to the seller . the initial seller of the instrument- a corporation or government agency , for example- does not receive the proceeds . the initial issuer receive only the proceeds from the sale of the instrument in the primary market .
If the initial seller of a financial instrument raises funds from a lender only in the primary market,why are secondary markets so important?The reasons relate to risk sharing,liquidity,and information.Smoothly functioning secondary markets make it easier for investors to reduce their exposure to risk by holding a diversified portfolio of stocks,bonds,and other assets.Secondary markets also promote liquidity for stocks,bonds,foreign exchange,and other financial instruments,so that it is easier for investors to sell the instruments for cash. This liquidity makes investors more willing to hold financial instruments,thereby making it easier for the issuing firm or government agency to sell the securities in the first place.Finally,secondary markets convey information to both savers and borrowers by determining the price of financial instruments.

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