Definition
The finance term “Aftermarket” refers to the secondary market where investors buy and sell previously issued securities, such as stocks, bonds, and options. It includes all trading activity that occurs on exchanges and over-the-counter markets after the initial issuance of the securities. Essentially, it’s where the majority of public trading occurs.
Key Takeaways
- Aftermarket refers to the financial market where previously issued securities and financial instruments such as stocks, bonds, futures and options are bought and sold. It’s the trading that occurs after the initial public offering (IPO).
- It provides an additional and convenient platform for investors who missed the IPO or those who are looking to trade (buy or sell) their securities. It also determines the market price of a security after the initial offering.
- Most common individual investor trading is done in the aftermarket, including day trading and high frequency trading. The operations of these markets are under standard market regulations to ensure fairness and transparency in trading.
Importance
The finance term “Aftermarket” holds significant importance as it refers to the trading of financial instruments such as stocks, bonds, and commodities after the official trading hours of stock exchanges.
The activity within the aftermarket is often a good indication of the general direction in which the market may be moving during the next trading session.
One of the key advantages of the aftermarket is that it provides the ability for investors to react promptly to news or events that occur when the regular market is closed, showing its contribution to a more efficient and liquid market.
Explanation
The aftermarket in finance primarily serves the purpose of allowing continued trading of securities following their initial issuance. This secondary market ensures securities’ liquidity, which is a significant trait for investors as it enables them to buy and sell securities whenever they want. As opposed to primary markets where securities are created, aftermarket transactions allow existing shares to be resold amongst investors.
Thus, the aftermarket for securities plays an indispensable role in ensuring dynamism, stability, and liquidity in the financial system. The aftermarket also serves the crucial task of providing an arena for price discovery. The prices at which securities are traded in the aftermarket reflect the collective valuation of investors based on their evaluation of each company’s future prospects.
Through this process, the aftermarket aids in reflecting the true value of the entity in question. The free fluctuation of prices in the aftermarket can encourage transparency and signify underlying economic trends or corporate performance indicators. Thus, the aftermarket is a crucial element for maintaining an efficient and functional financial market.
Examples of Aftermarket
Stock Market Aftermarket: In the stock markets, aftermarket refers to trading that occurs after the official trading hours. Investors continue to buy and sell stocks over the electronic communication networks (ECNs) even after the exchange has closed. Key information like earnings reports are often released in the aftermarket, affecting stock price in the next regular market trading session.
Car Parts Aftermarket: In the automobile industry, aftermarket refers to the market for spare parts, accessories, and other components, which are not sourced from the original car manufacturers. These parts are generally used for replacement, performance enhancement, or customization of the vehicle.
Insurance Aftermarket: In the insurance industry, aftermarket refers to the secondary market for insurance policies. Here, existing policyholders can sell their policies to third parties instead of surrendering them back to the insurance company for a cash value. This aftermarket helps policyholders get better value for their policies as compared to surrendering them, while investors get to invest in policies with good returns and risks spread over a number of policies.
FAQs about the Aftermarket
What is the Aftermarket?
The aftermarket is a market where investors purchase securities or other assets from other investors rather than from issuing companies themselves. This is also known as secondary market.
What is the difference between primary market and aftermarket?
In the primary market, investors buy securities directly from the company issuing them, while in the aftermarket, investors buy securities from other investors rather than the issuing companies.
Why is the aftermarket important?
The aftermarket allows for the continuous purchasing and selling of securities that has already been issued. It helps provide liquidity in the market which is essential for a strong and healthy market.
What types of transactions take place in the aftermarket?
Two main types of transactions can be made, including buying or selling shares of stock, bonds, commodities, and a wide range of other securities and derivatives.
Does aftermarket have an impact on share prices?
Yes, trading in the aftermarket can affect the price of shares. If there is high demand for shares in the aftermarket, the price can rise. Conversely, if many shares are sold, the price can drop.
Related Entrepreneurship Terms
- Secondary Market
- Initial Public Offering (IPO)
- Stock Exchange
- Trading Volume
- Securities
Sources for More Information
- Investopedia: This website is a comprehensive resource that provides definitions, explanations, and examples for numerous finance terms and concepts, including Aftermarket.
- Bloomberg: Bloomberg is a globally renowned platform offering news, data, and analysis on financial markets, including essential information about Aftermarket.
- CNBC: As a leader in business news, CNBC provides real-time financial market coverage and business content which can be a reliable source for understanding finance terms like Aftermarket.
- MarketWatch: Serving as a financial information website, MarketWatch provides up-to-date news, analysis, and information about the financial markets, including terms such as Aftermarket.
