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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Introduction to the Securities Market

A broker's client asks why the secondary market is considered important to the primary market. Which is the most accurate reason?

The secondary market gives investors liquidity and continuous price discovery, so they can exit their holdings easily. This confidence makes them more willing to subscribe to new issues in the primary market. It does not guarantee listing gains or pay proceeds to issuers.

  1. AIt guarantees that every IPO is listed at a premium
  2. BIt provides liquidity and price discovery, which makes investors more willing to subscribe to new issuesCorrect
  3. CIt allows issuers to receive the proceeds of every trade
  4. DIt removes the need for any regulation of new issues

Explanation

Investors are more willing to invest in new issues when they can exit through a liquid secondary market with transparent pricing. The issuer does not receive proceeds from secondary trades, and listing premiums are never guaranteed.

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