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Difficulty: MediumThe Capital Market: Stock Exchange, Securities, and Trading

Which of the following financial transactions takes place exclusively within the secondary capital market?

  1. A
    A public limited company issuing new shares to the general public for the first time through a prospectus
  2. An investor trading previously issued equity shares with another investor through a licensed broker on the stock exchange floorAnswer
  3. C
    The Central Bank issuing ninety-day Treasury bills to commercial banks during open market operations
  4. D
    A commercial bank granting a short-term overdraft facility to a commercial business customer

Answer

An investor trading previously issued equity shares with another investor through a licensed broker on the stock exchange floor
The secondary capital market functions as a resale market for existing securities. Trading previously issued shares among investors through licensed stockbrokers on the stock exchange floor allows investors to liquidate or adjust their portfolios without affecting the original issuing company's share capital.

Step-by-Step Solution

1
Identify the defining characteristic of the secondary capital market
The secondary capital market provides liquidity by enabling the trading of existing (already issued) securities among investors.
Differentiating between the primary market (new issues) and the secondary market (existing issues) is essential to classify financial transactions.
2
Evaluate the given financial transactions against market definitions
First-time share offers represent the primary capital market. Treasury bills and overdrafts are money market instruments. Trading existing stocks on the exchange floor is the sole secondary market transaction.
Categorizing each option based on maturity period and issue stage confirms the correct secondary capital market activity.

Key Concept

Primary vs Secondary Capital Market Operations
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Topics

The Capital Market: Stock Exchange, Securities, and Trading

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