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

A company lists its shares for the first time on an exchange after an IPO in which it sold new shares to investors. Subsequently, an investor sells those shares to another investor through the exchange. Which statement correctly describes these two transactions?

The IPO is a primary market transaction because the company issues new shares and receives the money. The later sale between two investors on the exchange is a secondary market transaction, since existing securities change hands and the issuer receives no proceeds.

  1. ABoth are primary market transactions
  2. BThe IPO is a primary market transaction and the exchange sale is a secondary market transactionCorrect
  3. CThe IPO is a secondary market transaction and the exchange sale is a primary market transaction
  4. DBoth are secondary market transactions

Explanation

In the primary market, securities are issued afresh and the issuer receives the funds. In the secondary market, existing securities change hands between investors and the issuer receives nothing. So the IPO is primary and the later exchange trade is secondary.

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