What is the Secondary Market?
The secondary market is a forum where investors can buy or sell securities to/from other investors rather than directly from the issuer of the security. The primary market is where securities are actually created; issuances can be made through IPO's, savings bond purchases, or even corporate bond issuances.
Secondary markets exist for stocks, bonds, mortgage backed securities, mortgages, and even derivatives such as collateralized default obligations. Some of the most commonly known secondary markets are the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), Chicago Mercantile Exchange (CME), Nasdaq, and the New York Mercantile Exchange (NYMEX).
Auction vs Dealer Market
When you buy or sell a stock from your online broker; you are trading in the secondary markets. They are essential to creating efficient capital markets through efficiency and transparency. Transactions are being completed through one of two methods; an auction style exchange or a dealer exchange.
In an auction market, buyers and sellers will converge and place offers to buy and sell. These are commonly known as bid and ask. The buyer is bidding to buy a security at a certain price while the seller is "asking" a certain price to sell their security. The most aggressive buyer and seller have the best chances at executing their trade. The most popular example of an auction market is the New York Stock Exchange where there are traders on the floor (specialists) who are buying and selling securities with each other, electronically, or through the phone.
A dealer market is very similar in that the role of this market is to create liquidity and efficiency. Dealer markets, as readily seen on the Nasdaq, have market makers who keep an inventory of the security and then transact with customers with that inventory. Dealers will profit off of the bid/ask spread and the commissions charged to place the trade.