Recognize the controlling condition
Identify who issues a security, who owns it, and who receives the proceeds. A new issuance is different from a resale, and an intermediary can act in different capacities. These relationships explain more than a memorized market label. A primary-market sale distributes newly issued securities and raises proceeds for the issuer. The secondary market transfers ownership of existing securities between market participants. Agency capacity concerns acting for another party; principal capacity involves the firm's own account. A firm commitment involves an underwriter purchasing the issue, unlike merely using best efforts to place it.
Work a decision from its evidence
A company sells newly issued shares to investors to raise capital for its business. The appropriate response is to identify the sale as a primary-market transaction. The decisive reason is: A primary-market sale distributes newly issued securities and raises proceeds for the issuer. Compare the tempting alternative "Call it a secondary-market resale between existing investors.". A secondary-market resale transfers existing securities rather than describing this new issue. Before choosing, identify the specific condition that makes this rule applicable. Do not transfer a number, exception, or permission to a different situation without checking its conditions.
Contrast a different mistake
An investor sells an already outstanding listed share to another investor on an exchange. Here the appropriate response is: Identify the trade as a secondary-market transaction. A different proposed response is "Record the buyer's payment as new operating capital for the issuer.". The resale proceeds normally go to the selling investor, not to the issuer. The difference between these cases is the source of the risk or obligation, not a change in the decision maker's preference. Explain the distinction before reading the answer to the linked example.
Apply and check the method
For a new transaction, draw the issuer, the selling party, the buyer and the intermediary. Trace cash and securities separately. Ask whether the security is newly issued and whether the intermediary acts for a customer or its own account before applying a label. For primary market, ask whether the proposed response addresses this condition: A primary-market sale distributes newly issued securities and raises proceeds for the issuer. For secondary market, ask whether the proposed response addresses this condition: The secondary market transfers ownership of existing securities between market participants. For agency and principal capacity, ask whether the proposed response addresses this condition: Agency capacity concerns acting for another party; principal capacity involves the firm's own account. For underwriting commitments, ask whether the proposed response addresses this condition: A firm commitment involves an underwriter purchasing the issue, unlike merely using best efforts to place it. Check the explanation against the cited reference, then answer the associated case items without using the option length or answer position as a clue.
A company sells newly issued shares to investors to raise capital for its business. What is the most appropriate response?
Open full-size diagram ↗- Identify the controlling condition: Primary market.
- A primary-market sale distributes newly issued securities and raises proceeds for the issuer.
- Apply it: Identify the sale as a primary-market transaction.
- Compare the alternative "Call it a secondary-market resale between existing investors.": A secondary-market resale transfers existing securities rather than describing this new issue.
Compare the other answer choices
A secondary-market resale transfers existing securities rather than describing this new issue.
An equity issue is not an insured deposit account.
Later investor-to-investor trades do not ordinarily raise new proceeds for the issuer.
Try it, then explain it.
Complete a short set without looking at the example. After each answer, explain which evidence or rule supports your decision and why the alternatives do not fit.
Sources & authorship
Original Slope explanations and examples. References support the concepts; they are not the source of copied questions. Independent educator review is pending.
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