Examkin

Question

Difficulty: HardTypes of Markets and Trading Venues

A publicly traded corporation completes a follow-on public offering of 2,000,000 newly created shares to fund a strategic corporate acquisition. On the effective date of the offering, a retail investor purchases 100 of the newly issued shares through the underwriting syndicate, while simultaneously another investor purchases 100 existing shares of the same corporation on a national securities exchange. Which of the following statements correctly differentiates the market classification and flow of transaction proceeds between these two purchases?

  1. A
    Both transactions take place in the secondary market because the issuing corporation already has registered equity actively trading on an exchange.
  2. The purchase of newly issued shares takes place in the primary market with proceeds flowing to the issuing corporation, whereas the exchange transaction takes place in the secondary market with proceeds flowing between investors.Answer
  3. C
    The purchase of newly issued shares is executed in the Third Market because underwriters act as principal dealers, whereas exchange transactions are strictly Fourth Market agency trades.
  4. D
    The primary transaction is cleared directly by the Depository Trust Company (DTC) to fund the corporate balance sheet, while the secondary transaction is cleared by the National Securities Clearing Corporation (NSCC) which retains all trade proceeds.

Answer

The purchase of newly issued shares takes place in the primary market with proceeds flowing to the issuing corporation, whereas the exchange transaction takes place in the secondary market with proceeds flowing between investors.
The transaction involving newly created shares from a follow-on offering occurs in the primary market, where the issuing corporation receives the net proceeds of the sale to fund its expansion or acquisitions. Conversely, trading existing shares on a national securities exchange occurs in the secondary market, where transaction proceeds pass from the buyer to the seller, and the issuing corporation receives no proceeds.

Step-by-Step Solution

1
Analyze the issuer's role and the source of securities in both transactions.
The purchase from the underwriter involves newly created shares issued directly by the corporation to raise capital. The exchange purchase involves pre-existing shares circulating among public investors.
Identifying whether new securities are being created to raise issuer capital is the defining criterion between primary and secondary markets.
2
Classify each transaction into its appropriate market venue.
The follow-on offering transaction is a primary market transaction (specifically a primary distribution). The purchase on the exchange is a secondary market trade.
Primary markets handle initial public offerings and primary distributions for corporate issuers, while secondary markets provide liquidity for trading existing securities.
3
Determine the destination of transaction proceeds for each trade.
In the primary transaction, proceeds (less underwriting spread) flow directly to the corporate issuer. In the secondary transaction, proceeds flow from the buying investor to the selling investor.
Issuers receive proceeds exclusively from primary market transactions, never from secondary market trades.

Key Concept

Primary Market vs. Secondary Market Dynamics and Flow of Funds
Estimated Time:1m 30s
Rate this question

Topics

Types of Markets and Trading Venues

More questions from this topic