What distinguishes the primary market from the secondary market?

Prepare for the Citi Bank Technical Test. Engage in multiple choice questions, and flashcards, each question includes hints and explanations. Boost your readiness and confidence!

The primary market is characterized by the issuance of new securities. This is where companies, governments, or other entities offer new stocks or bonds to investors for the first time, typically through an Initial Public Offering (IPO) for stocks or a new bond offering for bonds. The significance of the primary market lies in the fact that it facilitates capital formation, allowing issuers to raise funds to invest in operations, expand businesses, or finance projects.

In contrast, the secondary market is where previously issued securities are traded among investors without direct involvement from the issuing companies. Transactions in this market do not provide new capital to the issuer, as they are merely the resale of existing securities. Understanding this distinction is critical in financial markets, as it captures the different roles and processes involved in capital raising and trading.

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