What is secondary market?

Crowdfunding and the Secondary Market

In crowdfunding, especially equity crowdfunding, individuals invest in startups or real estate projects through platforms like Companisto or Crowdcube. In the primary market, an investor buys shares or securities directly from the issuing company or project during the fundraising campaign.

However, early-stage businesses often have long exit timelines, making it difficult for investors to liquidate their holdings. Here, a secondary market can provide an essential solution. Crowdfunding platforms like Seedrs have introduced secondary markets where investors can sell their shares to others before a company goes public or gets acquired.

Example: Companisto

On Companisto, once you have purchased equity in a startup, you are generally expected to hold onto that investment until the company either goes public or is sold. However, Seedrs offers a secondary market that opens for one week each month. During this period, investors can sell their shares to other interested buyers. This allows investors to exit investments early, providing liquidity in what would otherwise be a long-term, illiquid investment.

Without a secondary market, investors might have to wait for years, or even decades, before realizing any returns. Companisto’s secondary market allows you to sell your investment to someone else, potentially freeing up your capital for new opportunities.

P2P Lending and the Secondary Market

In P2P lending, platforms like Mintos or Viainvest allow individuals to lend money to small businesses or consumers in return for interest payments. Initially, when you invest in a loan, you’re committing to the full term of the loan, often several months or even years.

However, if you need access to your capital before the loan matures, a secondary market comes into play. Many P2P platforms provide a secondary market where investors can sell their loan parts to other investors.

Example: Mintos

Mintos, one of the largest P2P lending platforms in Europe, offers a vibrant secondary market. Suppose you invested in a loan with a three-year maturity, but halfway through, you decide you want your money back. You can list your loan on the Mintos Secondary Market at a price you deem fair, whether that’s at a discount or premium. Other investors, attracted by the specific loan’s interest rate or risk profile, might purchase it.

This liquidity feature is crucial because P2P loans are typically long-term investments, and circumstances might change over time. The secondary market lets investors adjust their portfolios according to their needs or market conditions.

Micro-Property Investments and the Secondary Market

Micro-property investing involves fractional ownership in real estate, allowing investors to invest in properties with a minimal amount of capital. Platforms like Rendity, and Exporo enable investors to own a small share of residential or commercial properties.

In this case, the primary market refers to the direct purchase of a share in a property when it is initially listed. However, real estate is usually a long-term, illiquid asset, often requiring years to see significant returns.

This is where a secondary market becomes valuable. Some platforms allow investors to sell their shares to other investors who are looking to buy into real estate without waiting for new listings.

Example: Exporo

Exporo has a resale market where investors can sell their shares in residential and commercial properties to others. This market operates much like a secondary market for stocks, where investors set their price, and potential buyers can make offers.

For example, you might have invested in a property and hold 0.1% equity. If you wish to exit that position, you can list your shares on the Exporo Resale Market. This gives you the flexibility to cash out without having to wait for the property to be sold or the investment term to end.

Key Benefits of a Secondary Market

1. Liquidity: The most significant advantage of a secondary market is providing liquidity in otherwise illiquid investments. Investors can sell their positions if they need access to cash or wish to reallocate their capital elsewhere.
2. Portfolio Management: Investors can actively manage their portfolios by selling assets that no longer fit their risk tolerance or investment strategy.
3. Pricing Flexibility: On many platforms, investors have the flexibility to sell their positions at a premium or discount based on current market conditions, potentially boosting returns.
4. Diversification Opportunities: Secondary markets allow new investors to enter into an existing project at a later stage, often at a discounted price, thus offering an opportunity to diversify their portfolios.

Conclusion

The secondary market plays a crucial role in making alternative investments such as crowdfunding, P2P lending, and micro-property investing more accessible and flexible. By providing liquidity, it allows investors to manage their portfolios better and reduce the risks associated with long-term, illiquid investments. Platforms like Companisto, Mintos, and Exporo are leading the way in offering robust secondary markets, giving investors the chance to optimize their strategies in an evolving financial landscape.

Whether you are a novice or an experienced investor, understanding and utilizing the secondary market can enhance your investment journey, offering both flexibility and control over your portfolio.

FAQ: What is secondary market