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CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking

Which statement correctly distinguishes the primary market from the secondary market?

In the primary market, companies issue new securities and receive the funds raised, as in an IPO. In the secondary market, already issued securities are bought and sold among investors, and the issuing company receives no proceeds from these trades. Liquidity is the main function of the secondary market.

  1. AThe primary market is where existing securities are traded among investors, and the secondary market is where companies issue new securities
  2. BIn the primary market, new securities are issued by the company to investors and the company receives the funds; in the secondary market, existing securities are traded among investors without the issuer receiving fundsCorrect
  3. CBoth markets deal only in government securities and differ only in location
  4. DThe primary market is for short-term securities and the secondary market for long-term securities

Explanation

In the primary market, such as an IPO, the issuer sells fresh securities and receives the proceeds. In the secondary market, such as a stock exchange, investors trade already-issued securities and the issuer gets no money. The first option reverses the definitions.

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