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Question

Difficulty: MediumTypes of Markets and Trading Venues

An investor buys 500 shares of a technology company during its Initial Public Offering (IPO) managed by an investment banking syndicate. Eight months later, the investor sells all 500 shares to another investor on a registered stock exchange. Which of the following statements correctly describes the flow of funds in this secondary market transaction?

  1. The sale proceeds flow directly from the buyer to the seller, with the issuing corporation receiving no capital from the trade.Answer
  2. B
    The net sales proceeds are paid to the issuing corporation minus an underwriting commission retained by the exchange.
  3. C
    The facilitating broker-dealer absorbs the full purchase amount into its inventory as principal before remitting dividend yield to the seller.
  4. D
    The trade capital is permanently deposited into the National Securities Clearing Corporation (NSCC) to fulfill asset custody and safekeeping rules.

Answer

The sale proceeds flow directly from the buyer to the seller, with the issuing corporation receiving no capital from the trade.
In the secondary market, securities are traded exclusively between investors. The seller receives the capital from the buyer (less transaction fees), while the issuer is unaffected financially and receives no proceeds.

Step-by-Step Solution

1
Identify the transaction type
The resale of existing shares on a registered exchange between two investors is a secondary market transaction.
Primary market transactions involve the issuer selling new securities to investors to raise capital, whereas secondary market transactions involve trading existing securities between investors.
2
Determine fund destination
Fund proceeds flow from the purchasing investor to the selling investor.
Because the issuing company already raised capital in the initial public offering, subsequent secondary market transactions do not generate funds or proceeds for the issuer.

Key Concept

Primary vs. Secondary Market Dynamics
Estimated Time:1m 0s
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Topics

Types of Markets and Trading Venues

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