December Study Question of the Month

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Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.

Question

Relevant to the SIE.

Henry buys shares of ABC in an initial public offering.  Two months later he sells the shares to James.  Two months later James sells the shares to Carrie. Which of the following is true?
 
A. Henry’s sale to James is a primary market transaction, while James’s sale to Carrie is a secondary market transaction
B. Both Henry’s sale to James and James’s sale to Carrie are primary market transactions
C. Henry’s sale to James is a primary market transaction, while James’s sale to Carrie is a follow-on offering

D. Both Henry’s sale to James and James’s sale to Carrie are secondary market transactions

Answer: D. When an investor buys shares in an IPO from the issuer, the purchase is a primary market transaction.  After that, whenever sales of the security are traded from investor to investor, and not from the issuer to an investor, the sales take place in the secondary market.  Thus, while Henry’s initial purchase is a primary market transaction, his sale to James and then James’ sale to Carrie are both secondary market transactions.

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