What distinguishes primary markets from secondary markets?

• A. Primary markets deal with predictions; secondary markets deal with actualities
• B. Primary markets involve brand new securities; secondary markets trade existing ones
• C. Primary markets require government approval; secondary markets do not
• D. Primary markets are only for bonds; secondary markets are for stocks

Answer: (B)

The distinction between primary and secondary markets is fundamentally about the life cycle of securities and their transactions. Primary markets are where new securities are created and sold for the first time. This is the venue for initial public offerings (IPOs), where companies offer shares to the public to raise capital. Investors buy these securities directly from the issuing entities, which benefits the companies by providing them the necessary funds for expansion, operation, or various projects.

In contrast, secondary markets are where existing securities are traded among investors. These transactions do not provide direct funding to the issuing companies. Instead, they allow investors to buy and sell securities, creating liquidity in the market. The prices in secondary markets reflect supply and demand dynamics based on the performance and market perception of those existing securities.

This understanding highlights why the option that identifies primary markets as involving brand new securities and secondary markets as trading existing ones is accurate. It captures the essential nature of both market types, emphasizing their roles in the broader financial ecosystem.