A retail investor purchases 300 shares of an exchange-listed security through a online brokerage account. Several months later, the investor sells the entire position to another retail investor on the same exchange. Which of the following statements correctly describes the market classification and flow of funds for these transactions?
- Both transactions occur in the secondary market, where trade proceeds flow directly between buying and selling investors rather than to the issuing company.Answer
- BThe initial purchase is a primary market transaction because shares are acquired in a public venue, while the subsequent sale represents a secondary market trade.
- CThe broker-dealer facilitating the trade acts in a principal capacity as a dealer, executing the transaction from its own inventory and charging a commission.
- DThe depository clearing corporation acts as the counterparty to both investors, taking direct custody of transaction proceeds prior to secondary distribution.
Answer
Both transactions take place in the secondary market, meaning capital flows between investors rather than to the issuing corporation.
Secondary market trading consists of transactions between investors taking place on public exchanges or OTC venues. In these trades, capital flows from the buyer to the seller, and the issuing company receives no proceeds.
Step-by-Step Solution
Key Concept
Secondary Market vs. Primary Market Execution Dynamics
Estimated Time:1m 0s