A corporation sells newly issued common shares to investors in an underwritten offering. In which market does this transaction occur?
A. Secondary market
B. Primary market
C. Third market
D. Auction market
Show answer and reasoning
Correct answer: B. Primary market
The issuer is raising capital by selling newly created securities, so the transaction occurs in the primary market. Secondary-market transactions involve existing securities changing hands among investors.
- A: A secondary transaction does not provide sale proceeds from a new issue to the issuer.
- C: The third market describes certain exchange-listed securities traded over the counter, not an issuer's new offering.
- D: Auction describes a trading method and does not change a new issuance into a different capital-raising market.
Source: SEC-PRIMARY-SECONDARY -- Primary Market glossary entry, sentence defining issuer sales of new stocks and bonds
Why can an active secondary market make a newly issued security more attractive to investors?
A. It guarantees that the security cannot decline
B. It lets investors sell existing holdings more readily without requiring the issuer to redeem them
C. It requires the issuer to repurchase every order
D. It eliminates credit and market risk
Show answer and reasoning
Correct answer: B. It lets investors sell existing holdings more readily without requiring the issuer to redeem them
Secondary-market liquidity improves an investor's ability to convert an existing position into cash by finding another buyer. Liquidity facilitates trading but does not guarantee price, repayment, or absence of risk.
- A: Market liquidity cannot prevent adverse price movement.
- C: Ordinary secondary trades occur between market participants and do not compel issuer repurchase.
- D: Liquidity addresses ease of trading; it does not eliminate issuer credit risk or market risk.
Source: SEC-PRIMARY-SECONDARY -- Primary Market glossary entry contrasting issuance with subsequent investor-to-investor market trading
A securities firm executes a customer's order as agent and receives a commission. In what capacity is the firm acting?
A. Broker
B. Issuer
C. Transfer agent
D. Clearing corporation
Show answer and reasoning
Correct answer: A. Broker
A broker acts as an agent for a customer in effecting a securities transaction and is commonly compensated through a commission. A dealer instead trades for its own account as principal.
- B: An issuer creates or sells its own securities; it is not defined by executing a customer's agency order.
- C: A transfer agent maintains issuer security-holder records and processes transfers rather than soliciting and executing this trade.
- D: A clearing corporation supports comparison, clearance, and settlement rather than acting as the customer's commissioned execution agent.
Source: SEC-MARKET-PARTICIPANTS -- Market Participants heading, Broker-dealers subsection describing broker agency and dealer principal functions
A firm sells municipal bonds from its own inventory to a customer and includes a markup. How is the firm acting?
A. As an investment adviser charging an advisory fee
B. As a broker earning an agency commission
C. As a dealer acting as principal
D. As a transfer agent recording ownership
Show answer and reasoning
Correct answer: C. As a dealer acting as principal
Selling securities from the firm's inventory means the firm is a principal to the trade and therefore acts as a dealer. A markup or markdown is associated with a principal transaction rather than an agency commission.
- A: Advice may accompany a relationship, but selling inventory identifies principal dealer capacity.
- B: A broker acts as the customer's agent; the firm here is the customer's counterparty.
- D: Transfer agents maintain ownership records and process changes but do not sell a broker-dealer's inventory to customers.
Source: SEC-MARKET-PARTICIPANTS -- Market Participants heading, Broker-dealers subsection distinguishing dealer principal trades from broker agency trades
After a shareholder sells certificated stock, which market participant normally updates the issuer's ownership records and cancels and issues certificates when required?
A. Transfer agent
B. Market maker
C. Investment adviser
D. Underwriter
Show answer and reasoning
Correct answer: A. Transfer agent
A transfer agent maintains the issuer's security-holder records and handles ownership changes, including certificate cancellation and issuance where certificates are used.
- B: A market maker quotes prices and stands ready to trade; it does not maintain the issuer's shareholder register.
- C: An investment adviser provides securities advice for compensation rather than maintaining issuer ownership records.
- D: An underwriter distributes a securities offering and does not perform routine post-trade shareholder recordkeeping.
Source: SEC-MARKET-PARTICIPANTS -- Market Participants heading, Transfer agents subsection describing recordkeeping and certificate functions
