Which of the following is a primary market activity?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Brokers resell to the public the shares they bought en bloc from the issuing company.

Option (1) A broker buys a company’s shares for a client through a trading terminal. — Incorrect. Buying through a broker’s trading terminal is a deal in existing shares on the stock exchange, the secondary market.

Option (2) Brokers resell to the public the shares they bought en bloc from the issuing company. — Correct. This is an offer for sale, a method of floating new issues. The company sells securities en bloc at an agreed price to brokers, who resell them to the public. The shares reach investors for the first time.

Option (3) A fresh investor buys a company’s shares from an existing investor. — Incorrect. Helping existing investors to disinvest and fresh investors to enter is the role of the secondary market.

Option (4) An investor resells on the exchange the shares allotted to him in an IPO. — Incorrect. Once allotted, the shares already exist. Reselling them on the exchange is secondary market trading.

NCERT (Pre-rationalised Edition): “PRIMARY MARKET … There are various methods of floating new issues in the primary market :”

“2. Offer for Sale: Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the investing public.”

“SECONDARY MARKET The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market. It also provides liquidity and marketability to existing securities. …”