Looking for the answer to the question below related to Financial Management ?
Stock exchange is
|A. Primary market
B. Secondary market
C. Money market
D. None of these
The Correct Answer Is:
- B. Secondary market
The correct answer is B. Secondary market. A stock exchange is indeed a secondary market. Let’s explore why this is the correct answer and why the other options are not accurate descriptions of a stock exchange:
B. Secondary Market:
A stock exchange is a secondary market where previously issued securities, such as stocks and bonds, are bought and sold by investors. In the secondary market, these securities are traded among investors rather than being directly issued by the companies or entities that originally issued them.
The primary function of a secondary market is to provide liquidity and a platform for investors to trade existing securities. When investors buy and sell shares of publicly traded companies on a stock exchange, they are engaging in secondary market transactions.
The prices of securities in the secondary market are determined by supply and demand forces, and trading takes place among investors, not with the issuing company.
Now, let’s examine why the other options are not correct:
A. Primary Market:
The primary market is where securities are first issued and sold to the public by companies or entities seeking to raise capital. In the primary market, new shares of stock or bonds are offered to investors through processes like initial public offerings (IPOs) and bond issuances.
The primary market is the initial point of entry for securities into the market, and it involves the direct interaction between the issuing entity and investors. A stock exchange is not considered a primary market because it is not where new securities are initially created and issued.
C. Money Market:
The money market is a separate segment of the financial market that deals with short-term debt instruments with maturities typically ranging from a few days to one year. Examples of money market instruments include Treasury bills, commercial paper, and certificates of deposit.
Money market securities are known for their high liquidity and low risk. While a stock exchange is a market for trading securities, it primarily deals with equities (stocks) and some types of bonds, which are not typically categorized as money market instruments. Therefore, a stock exchange is not considered part of the money market.
D. None of These:
Option D suggests that none of the provided options accurately describe a stock exchange. However, as explained earlier, a stock exchange is correctly described as a secondary market where existing securities are traded among investors.
It serves as a platform for buyers and sellers to exchange ownership of publicly traded companies’ shares. Therefore, option D is not the correct answer as it contradicts the well-established role and function of a stock exchange.
In summary, a stock exchange is indeed a secondary market where previously issued securities are bought and sold by investors. It plays a crucial role in providing liquidity to the financial markets, allowing investors to trade shares of publicly traded companies.
The primary market, on the other hand, is where new securities are initially issued, while the money market deals with short-term debt instruments. Accurate understanding of these distinctions is essential for investors and those involved in the financial industry.