What role do secondary markets play in finance?

Secondary markets serve a crucial function in finance by providing investors with the ability to buy and sell existing securities. This trading activity enhances liquidity, meaning investors can more easily convert securities into cash when needed. The existence of secondary markets promotes price discovery, as the ongoing buying and selling reflects the current market value of the securities based on supply and demand dynamics. Additionally, having a vibrant secondary market can make primary issuance more attractive, as investors have the assurance that they can liquidate their holdings if necessary.

In contrast, the other choices reflect misunderstandings of the primary functions or characteristics of secondary markets. They do not focus on trading existing securities, which is central to the role of secondary markets in providing liquidity and fostering a more active market environment.