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

Which of the following best explains why a well-developed secondary market supports the functioning of the primary market?

A developed secondary market lets investors sell their holdings easily and shows market prices. This liquidity encourages them to subscribe to new issues, and the price signals help issuers decide pricing. It does not guarantee subscription or pay the company on trades.

  1. AIt guarantees that every new issue is fully subscribed at the issue price
  2. BIt lets investors exit easily, so they are more willing to subscribe to new issues, and it gives price signals for future issuesCorrect
  3. CIt allows companies to receive proceeds from every trade in their shares
  4. DIt removes the need for disclosure in public issues

Explanation

Liquidity lets investors sell when needed, encouraging participation in new issues, and market prices guide issuers on pricing. Option C is wrong because the company does not receive trade proceeds in secondary trading, and the market cannot guarantee subscription.

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