Which one of the following is a primary market transaction?

Question

BlackTom AI · Accepted Answer

Primary markets are where an issuer sells newly created securities and receives the proceeds. A classic example is an initial public offering (IPO) or a follow-on (seasoned) equity offering: the company issues new shares to investors through underwriting, and the funds flow to the issuer.

1) Relevant concepts and definitions
- Primary market: issuance of new securities by the issuer; proceeds go to the issuer (company or government).
- Secondary market: trading of existing (outstanding) securities among investors/dealers; issuer generally not involved and does not receive proceeds.
- Dealer transaction: a dealer may buy securities (often in the secondary market) and resell them from inventory; these are secondary trades even if a dealer is the seller.
- Transfers/gifts: changes in ownership of outstanding shares without issuance; these are secondary transactions (no new securities created).

2) Step-by-step reasoning for each option
Step 1: Determine whether the transaction creates a new share and whether the issuer receives funds.
Step 2: If yes, classify as primary; if no (ownership simply changes hands), classify as secondary.

Apply to each option:
- "Sale of currently outstanding stock by a dealer to an individual investor." Dealer is reselling existing shares from inventory, issuer receives no new funds → secondary market.
- "Sale of a new share of stock to an individual investor." A new share is created and sold; issuer receives proceeds → primary market.
- "Stock ownership transfer from one shareholder to another shareholder." Ownership changes among investors; no new issuance → secondary market.
- "Gift of stock from one shareholder to another shareholder." Transfer by gift; no issuance and no proceeds to issuer → secondary.
- "Gift of stock by a shareholder to a family member." Same reasoning as above → secondary.

3) Calculations
No numerical calculations are required; classification depends on whether new securities are issued and whether the issuer receives proceeds.

4) Why the correct answer is correct
"Sale of a new share of stock to an individual investor" is the only option involving issuance of a new security with proceeds going to the issuer, which defines a primary market transaction.

5) Why other options are incorrect
Each other option involves resale or transfer of already outstanding shares (dealer sale, shareholder-to-shareholder sale or gift), so they are secondary-market transactions.

Conclusion: The correct answer is "Sale of a new share of stock to an individual investor," which matches the provided answer.

Which one of the following is a primary market transaction?Single choice

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