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IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

A large Indian company sells new shares to the public for the first time through an initial public offering. In which market does this transaction take place, and what is its effect on the company?

An initial public offering is a sale in the primary market, because new securities are issued and the proceeds go to the company as fresh capital. Later trading of those shares between investors occurs in the secondary market and gives the company no new funds.

  1. ASecondary market; the company receives no new funds
  2. BPrimary market; the company raises new fundsCorrect
  3. CMoney market; the company obtains short-term working capital
  4. DForeign exchange market; the company acquires foreign currency
  5. Secondary market; the company's existing shareholders receive the proceeds

Explanation

New securities issued for the first time are sold in the primary market, and the proceeds go to the issuing company. The secondary market is where existing securities are traded between investors, and the issuer gets nothing from those trades. Shares are long-term capital, not money market instruments.

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