Secondary Markets

Secondary markets are interesting in that they are created by the government to help redistribute money that is used for loans. Fannie Mae and Freddie Mac are two of the major corporations from which stocks are purchased on a secondary market.

Here is how it works. When a person purchases a home, he or she requests a loan from the bank, usually for about eighty percent of the cost of the house. This is granted, and the house is purchased by the bank for the individual or family, who begins to pay off the loan to the bank.

Meanwhile, to assure that money is available at that bank for the next person who needs a mortgage loan, Fannie Mae or Freddie Mac, two entities originally established by the United States government, will purchase the loan from the bank. Therefore, the money is returned to the bank for use in the future.

What do these agencies then do with the deficit they have acquired? They sell it. On the secondary market, they break up the loan into shares that are backed by the mortgage itself and sell those shares, recovering the money from investors. Eventually, those securities mature, probably about the same time that the original loan is paid off to the bank, and the investors reap the benefits of their investment with the interest earned.

Another way to take advantage of a volatile international stock market is to make a swap. This is the exchange of securities or bonds in order to take advantage of lower interest rates.

For example, if a business entity in Britain is in possession of one security, and another in Japan is in possession of a different security, the two commodities may be beneficially traded or sold to each other in order to save on the interest rates, if the currently held bond or security is kept at a lower interest rate in the opposing market.

For example, let’s say one business is in possession of a bond “A” that is paying out only two percent interest in its current market, and another is holding bonds “B” in its market at three percent interest.

If bond A is actually paying out three percent on the foreign market, and bond B can be cashed in for four percent on the first market, both parties can make more money on a trade of bonds.

They can mutually benefit from a sale of the securities to each other due to a gain of more interest.

If that seems confusing, then perhaps a swap is not in your near future. This is more often processed between businesses on the foreign market rather than individual parties, though with the correct broker, it could be accomplished. However, should you work the deal, you need know little except that you are looking at a higher profit margin than previously, and your broker will take care of the rest.

If you determine that you should have stock options as a business, you will probably decide to hire a fulltime consultant for all your financial needs, including the handling of your share holdings.

In fact, when businesses are large enough and present a strong enough trading presence within the market, especially on Forex, you will find that there are entire departments dedicated to maintenance on the stock options.

Secondary Markets