What is a secondary market for equity?

The secondary market for equity involves the trading of a company's shares after the initial share issuance in the primary market. It's characterized by the resale of existing shares from one investor to another, typically evidenced in public stock exchanges where shares of publicly traded companies are bought and sold. In the context of private companies, a secondary market can refer to situations where privately held shares are bought and sold outside initial offerings, often involving shares owned by early investors or employees who seek to liquidate some or all of their stake in a private company.

For privately held companies, like startups, secondary markets serve as a means for early investors, employees, or founders to monetize their investments or compensation in the form of equity. As companies stay private longer, secondary markets provide essential liquidity, allowing stakeholders to realize part of their investment or compensation without waiting for an IPO or an acquisition. This market has grown substantially and has become more structured with platforms designed to facilitate these transactions, even in the absence of a public listing 1 2.

Secondary markets benefit both sellers seeking liquidity and buyers looking for investment opportunities in companies not publicly listed. It enables new investors to enter at a stage where companies demonstrate substantial growth potential, often with less risk compared to the initial investment phase 3.