Primary and Secondary Markets
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Questions and Answers

What is the primary function of financial markets?

  • To provide a platform for trading financial products. (correct)
  • To regulate economic growth.
  • To facilitate trade in consumer goods.
  • To facilitate international trade.

    • What type of market provides short-term debt financing and investment?

  • Derivatives Market
  • Capital Market
  • Money Market (correct)
  • Stock Market

    • What is the primary market responsible for?

  • Issuance of new securities (correct)
  • Trading of existing securities
  • Foreign exchange trading
  • Regulation of financial markets

    • What is the purpose of financial regulators in the capital market?

    <p>To protect investors from fraud</p> Signup and view all the answers

    What is an initial public offering (IPO)?

    <p>A type of stock issue</p> Signup and view all the answers

    What type of market facilitates the trading of foreign exchange?

    <p>Foreign Exchange Market</p> Signup and view all the answers

    What is the capital market composed of?

    <p>Primary market and secondary market</p> Signup and view all the answers

    What is the purpose of the capital market?

    <p>To enable companies and governments to raise long-term funds</p> Signup and view all the answers

    What is the impact of an increase in companies issuing securities in the capital market?

    <p>Increased participation by investors in the secondary market</p> Signup and view all the answers

    What is the role of investors in a capital market?

    <p>To attract savings from the public</p> Signup and view all the answers

    What is the primary function of a depository?

    <p>To hold securities in electronic form on behalf of investors</p> Signup and view all the answers

    What is another term used to describe a stock exchange?

    <p>Secondary market</p> Signup and view all the answers

    What is the impact of an active primary market on the secondary market?

    <p>Increased activity in the secondary market</p> Signup and view all the answers

    What is the term used to describe investors who invest in a capital market?

    <p>Investors</p> Signup and view all the answers

    What is the primary market for?

    <p>Issuance of new long-term capital</p> Signup and view all the answers

    What is the main difference between primary and secondary markets?

    <p>The involvement of the company</p> Signup and view all the answers

    What happens in the secondary market?

    <p>Already issued securities are traded</p> Signup and view all the answers

    What is the purpose of the primary market?

    <p>To provide additional funds to issuing companies</p> Signup and view all the answers

    What is traded in the secondary market?

    <p>Already issued stocks, bonds, options, and futures</p> Signup and view all the answers

    What is the role of a stock exchange?

    <p>To facilitate trading of already issued securities</p> Signup and view all the answers

    What is the main characteristic of the primary market?

    <p>Direct involvement of the company</p> Signup and view all the answers

    What does the secondary market not provide?

    <p>Additional funds to companies</p> Signup and view all the answers

    What do intermediaries offer in relation to the capital markets?

    <p>Various services</p> Signup and view all the answers

    What is the maturity period of financial instruments traded in the capital market?

    <p>More than one year</p> Signup and view all the answers

    What is a characteristic of preference shares?

    <p>Have a prior claim on assets and earnings</p> Signup and view all the answers

    What do debentures/bonds represent in a company?

    <p>Debt</p> Signup and view all the answers

    What is the primary role of intermediaries in the capital market?

    <p>To facilitate lending and borrowing</p> Signup and view all the answers

    What is a key difference between equity shares and preference shares?

    <p>Voting rights</p> Signup and view all the answers

    What is the primary benefit of capital market instruments?

    <p>Long-term capital formation</p> Signup and view all the answers

    What is the relationship between the buyer and issuer of bonds?

    <p>Debtor-creditor</p> Signup and view all the answers

    What is the main characteristic that distinguishes a bond from a car loan or home-improvement loan?

    <p>Ability to be bought and sold in the open market</p> Signup and view all the answers

    What is the purpose of depositary receipts (GDRs)?

    <p>To provide local settlement for international investors</p> Signup and view all the answers

    What is the definition of a derivative?

    <p>A financial instrument that derives its value from another financial instrument</p> Signup and view all the answers

    What is the primary difference between a future and an option?

    <p>One gives the right but not the obligation to buy/sell, while the other obliges the buyer/seller</p> Signup and view all the answers

    What is the purpose of a warrant attached to a GDR?

    <p>To give the investor an option to convert to equity at a later date</p> Signup and view all the answers

    What is the primary function of a call option?

    <p>To give the buyer the right to buy the underlying asset at a predetermined price</p> Signup and view all the answers

    What is the primary characteristic of a bond with a maturity period of less than one year?

    <p>It is a money market instrument</p> Signup and view all the answers

    What is the obligation of the seller of an option?

    <p>To settle the option when the buyer exercises their right</p> Signup and view all the answers

    Study Notes

    Financial Markets

    • Financial markets are organizations that facilitate the trade in financial products, such as stock exchanges, which facilitate the trade in stocks and bonds.

    Types of Financial Markets

    • Capital Market: provides financing through the issuance of shares and enables subsequent trading; includes stock markets, bond markets, money markets, derivatives markets, foreign exchange markets, and commodity markets.

    Capital Market

    • A market for securities where companies and governments can raise long-term funds.
    • Includes the stock market and bond market.
    • Financial regulators oversee the capital markets to ensure investor protection against fraud.
    • Consists of primary markets and secondary markets.

    Primary Market

    • Deals with the issuance of new securities.
    • Companies, governments, or public sector institutions can obtain funding through the sale of new stock or bond issues.
    • Features:
      • Market for new long-term capital.
      • Securities are sold for the first time.
      • Issued by the company directly to investors.

    Secondary Market

    • The market for trading securities that have already been issued in an initial offering.
    • Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange.

    Primary Market vs. Secondary Market

    • Primary market: market for new securities issued by the company to the public for the first time.
    • Secondary market: market where new securities already issued are traded.
    • Primary market involves direct company involvement, while the secondary market does not.
    • Primary market deals with new securities, while the secondary market deals with already issued securities.

    Participants in the Capital Market

    • Investors: lifeline of any capital market; attract savings of investors, including retail investors, institutional investors, and foreign portfolio investors.
    • Stock Exchange: a place where securities issued by issuer companies are listed and traded.
    • Depository: holds securities of investors in electronic form and provides other services like pledge, safekeeping, and stock lending and borrowing.

    Capital Market Instruments

    • Financial instruments with maturity over one year, such as bonds and stocks.
    • Available instruments include:
      • Shares (equity and preference)
      • Debentures/Bonds
      • Depository Receipts
      • Derivatives

    Shares

    • Type of security signifying ownership in a corporation and giving:
      • Voting rights
      • Dividend entitlement
    • Two main types of shares:
      • Equity shares
      • Preference shares

    Preference Shares

    • Carry a preferential right to be paid in case of company bankruptcy or liquidation.
    • Preference shareholders have negligible voting rights but higher claim on assets and earnings.

    Debentures/Bonds

    • Long-term debt securities among corporates.
    • Certificate evidence of a lender-creditor relationship.
    • Bonds with maturities less than one year are called money market instruments.

    Depository Receipts (GDR)

    • Provide international investors with local settlement.
    • Issuer pays dividends to the depository in the domestic currency, which is then converted to dollars for onward payment to receipt holders.
    • GDRs bear no risk of capital repayment and may be issued with warrants attached.

    Derivatives

    • Financial instruments deriving value from another financial price (underlying).
    • Most important derivatives include futures and options.

    Futures

    • Agreements to buy or sell the underlying security at a future date and specified price.

    Options

    • Give the buyer the right to buy/sell the underlying asset at a predetermined price within or at the end of a specified period.
    • There are two types of options: call and put.

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    Description

    Learn the key differences between primary and secondary markets, including the sale of securities and trading on stock exchanges.

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