Investors are Purchasers of Risk

purchasersPurchasers are people who buy things.

Purchasers of risk are called funders or investors. Funders and investors are not suppliers of money, they are purchasers of risk.

While there are no such things as loans, it can be explained that loans are the purchase of money, and funding institutions who make loans are the purchasers of the risks involved in making these loans. Ownership of assets are the hallmark characteristics of purchasers.

In real estate, for example, the secondary market represents the purchasers of mortgages. Purchasers (consumers) who finance their homes are often surprised when, after a mortgage broker tells them their home is being financed by ABC company, the first mortgage payment arrives in their mailboxes from XYZ company.

The secondary market is where purchasers and sellers trade securities they already own. It is what most people typically think of as the stock market, but stocks are also sold on the primary market when they are first issued. The national exchanges, such as the New York Stock Exchange and the NASDAQ, are secondary markets.

Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Entities such as Fannie Mae and Freddie Mac also purchase mortgages on a secondary market.

Primary vs. Secondary Markets

It is important to understand the distinction between the secondary market and the primary market. When a company issues stock or bonds for the first time and sells those securities directly to investors, that transaction occurs on the primary market. Some of the most common and well-publicized primary market transactions are IPOs, or initial public offerings.

During an IPO, a primary market transaction occurs between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock, after accounting for the bank’s administrative fees.

If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank.

The number of secondary markets that exists is always increasing as new financial products become available. In the case of assets such as mortgages, several secondary markets may exist. Bundles of mortgages are often repackaged into securities such as GNMA (Government National Mortgage Association, aka Ginnie Mae) pools and resold to investors.

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