Given below are two statements:
Statement I: The primary market deals with new securities which were not previously tradable to the public.
Statement II: The primary market indirectly promotes capital formation.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is correct but Statement II is incorrect.
Statement I: The primary market deals with new securities which were not previously tradable to the public. — Correct. The primary market is the new issues market. It deals with securities issued for the first time, which the public could not trade before.
Statement II: The primary market indirectly promotes capital formation. — Incorrect. In the primary market, savers’ funds go straight to the company issuing the securities. So the primary market directly promotes capital formation. It is the secondary market that promotes it indirectly, by making shares easy to sell.
NCERT (Pre-rationalised Edition): “PRIMARY MARKET The primary market is also known as the new issues market. It deals with new securities being issued for the first time. The essential function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time. The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals. …”
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