What distinguishes primary markets from secondary markets?

• A. Primary markets issue new securities; secondary markets trade existing securities.
• B. Primary markets trade existing securities; secondary markets issue new securities.
• C. Primary markets set prices; secondary markets do not.
• D. Primary markets deal with equities only; secondary markets deal with debt only.

Answer: (A)

The key idea is that the primary market is where new securities are created and sold to raise fresh capital for the issuer, while the secondary market is where those existing securities are traded between investors, with no new funds going to the issuer.

In this framework, the correct answer captures the essence: the primary market issues new securities, and the secondary market trades securities that already exist. This distinction explains why IPOs or new bond issuances bring money to the issuing company (primary market), whereas exchanges like the stock market or over-the-counter trading let investors buy and sell those securities among themselves (secondary market), providing liquidity and price discovery.

The other statements don’t fit as well. The idea that the primary market sets prices while the secondary market does not isn’t accurate, because pricing is determined differently in each: issuers and underwriters typically establish the terms and price of a new issue, but secondary markets continuously discover prices through supply and demand. Also, saying one market handles equities and the other deals with debt only is incorrect, since both markets can trade a range of securities, including both equities and bonds.