A financial advisor is explaining market structure to a client who wants to understand how capital flows during different types of securities transactions. Which of the following statements accurately describe the operational differences between primary and secondary markets? Select ALL that apply.
- In a primary market transaction, the proceeds generated from the sale of newly issued securities flow directly to the issuing corporation or government entity.Answer
- In secondary market transactions, securities are traded between investors, and the original issuing corporation receives no proceeds from the trade.Answer
- CWhen an investor purchases existing shares of stock on an exchange such as the NYSE, the cash proceeds are remitted directly to the issuing company.
- DBroker-dealers executing secondary market orders on behalf of clients in a broker (agency) capacity purchase the securities into their own inventory.
Answer
The correct statements are that primary market transactions deliver proceeds directly to the issuing entity, and secondary market trades take place between investors without capital flowing to the issuing company.
Primary market transactions involve the original creation and sale of securities where the issuer receives the proceeds. Secondary market transactions involve trading existing securities between investors where the issuer receives no funds.
Step-by-Step Solution
Key Concept
Primary vs. Secondary Market Capital Flow and Function