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Trading on the primary & secondary markets

You can buy and sell fixed income investments directly from the issuer or on a secondary market. Understand the differences.

POINTS TO KNOW

  • Vanguard Brokerage offers CDs and bonds in both primary and secondary markets.
  • Buying CDs and bonds in the primary market means you're transacting with the issuer of the security.
  • Buying or selling CDs and bonds in the secondary market means you're transacting with other market participants.

What are primary & secondary markets?

Primary market

When you buy a CD (certificate of deposit) or bond on the primary market, you're buying a security that's just been created, commonly referred to as a "new-issue." It's like buying a new car. You're the original owner.

Proceeds from your purchase go to the issuer of the security, such as a bank for CDs and corporation or government agency for bonds.

Secondary market

When you buy or sell a CD or bond on the secondary market, you're transacting with another market participant, not the issuing company or agency. It's like buying a used car.

If you're selling a security, you get the proceeds; if you're buying one, proceeds go to the seller.

Compare the features of primary & secondary markets

Here's a breakdown of the pros and cons of investing in each market.

Primary market

Pros

  • New-issue offerings from the government, agencies, municipalities, and corporations.
  • Price for all investors disclosed up front.
  • Stable and predictable investment income.
  • No bid-ask spread.
  • For CDs, simple interest; CDs not renewable at maturity.

Cons

  • Market limited to currently available offerings.
  • No price flexibility.
  • For CDs, an interest penalty if redeemed prior to maturity.

Secondary market

Pros

  • Larger selection of CDs and bonds.
  • Flexibility in timing and pricing trades.
  • Stable and predictable investment income.
  • Liquidity in buying and selling.

Cons

  • Fluctuating prices based on prevailing interest rates, credit quality of the issuer, and general economic conditions.
  • Largely an over-the-counter (OTC) market where prices aren't seen by all participants at the same time.
  • Dependent on the broker-dealer network to get the best price.
  • For CDs, an interest penalty if redeemed prior to maturity.

Learn how Vanguard Brokerage works to get the best price for you

When trades settle in each market

Trades on either market settle through your money market settlement fund at different times, depending on the security.


CDs

PRIMARY MARKET

Usually 1 or 2 weeks depending on the issue from the bank

SECONDARY MARKET

The second business day after the trade date


GNMAs

PRIMARY MARKET

Typically around the end of the third week of the month (21st or 22nd)

SECONDARY MARKET

The next business day after the trade date


Treasuries (bought at auction)

PRIMARY MARKET

Typically 3 business days

SECONDARY MARKET

The next business day after the trade date


Corporate bonds

PRIMARY MARKET

A few days or a few weeks, depending on the issue

SECONDARY MARKET

The second business day after the trade date


Agency bonds

PRIMARY MARKET

As defined by the issuer

SECONDARY MARKET

The next business day after the trade date


Municipal bonds

PRIMARY MARKET

As defined by the issuer

SECONDARY MARKET

The second business day after the trade date


Commissions & fees

PRIMARY MARKET

Vanguard Brokerage acts as a principal only for new issues in corporate bonds and CDs. Vanguard Brokerage generally receives a fee concession from the underwriter.

SECONDARY MARKET

Vanguard Brokerage always acts as an agent in the secondary market, executing the trade at the price you've chosen and charging a commission. There is no markup or markdown.


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REFERENCE CONTENT

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CD (certificate of deposit)

An insured, interest-bearing deposit that requires the depositor to keep the money invested for a specific period of time or face penalties. Brokered CDs can be traded on the secondary market.

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Bond

A loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.

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Bid-ask spread

Bid: The price that someone is willing to pay for a particular security.

Ask/Offer: The price at which someone is willing to sell a particular security.

The bid/ask spread refers to the difference between the highest buyer's price (best bid) and the lowest seller's price (best ask).

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Simple interest

Interest calculated on the original principal amount.

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Maturity

The length of time between a bond’s issue date and when its face value will be repaid.

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Liquidity

A measure of how quickly and easily an investment can be sold at a fair price and converted to cash.

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Interest/Interest rate

Income you can receive by investing in bonds or cash investments. The investment's interest rate is specified when it's issued.

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Credit quality

A measure of a bond issuer's ability to repay interest and principal in a timely manner.

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Over-the counter (OTC) security

A security that isn't listed and traded on an organized exchange. Many OTC stocks trade through:

The OTC Bulletin Board

An electronic quotation service showing real-time quotes, last-sale prices, and volume information for OTC stocks not listed on the Nasdaq.

Pink Sheets

A daily publication of the National Quotation Bureau giving the bid and ask prices of OTC stocks not listed on the Nasdaq.

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Inflation risk

The possibility that increases in the prices of goods and services will reduce or eliminate the returns on a particular investment.

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Settlement date

The date by which a broker must receive either cash or securities to satisfy the terms of a security transaction.

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Settlement fund

A money market mutual fund that holds the money you use to buy securities, as well as the proceeds whenever you sell.

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Trade date

The actual date on which shares are purchased or sold.

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Underwriter

A company or another entity that handles the public issuance and distribution of securities from a corporation or other issuer.

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Finding the right match

Vanguard Brokerage doesn't hold an inventory of CDs and bonds. Instead, we maintain trading relationships with a large number of bond dealers.

The broker-dealers in our extensive network compete against each other to sell us securities, resulting in the best possible price for you.

And because we don't put up capital to maintain a bond inventory, we can pass our savings on to you. Our commissions, markups, and markdowns are among the lowest in the industry.

Our fixed income specialists can also research bonds that best meet your needs or help find a buyer who wants the bond you're selling.

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Securities

Stocks, bonds, money market instruments, and other investment vehicles.