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CS Executive · Capital Market and Securities Laws · Basics of Capital Market

A company issues shares to the public for the first time through an initial public offer, and the shares are then listed. Later, an investor sells these shares to another investor on the exchange. Which statement correctly describes the roles of the two markets?

The IPO is a primary market activity because the company issues new shares and receives funds. The later sale between investors on the exchange is secondary market trading, which provides liquidity and price discovery for the listed shares.

  1. AThe IPO is a secondary market activity and the later sale is a primary market activity
  2. BBoth the IPO and the later sale are primary market activities
  3. CThe IPO is a primary market activity and the later sale provides liquidity in the secondary marketCorrect
  4. DBoth are secondary market activities because the shares are listed

Explanation

An IPO is a fresh issue by the company, so it forms the primary market. Subsequent trading of listed shares between investors occurs in the secondary market and gives liquidity and price discovery. Option A reverses the two roles.

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