Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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In which market do investors buy and sell securities that they already own?

Primary market
Secondary market
Third market
Fourth market

The correct answer is: Secondary market

The secondary market is where investors engage in the buying and selling of securities that they already own. In this market, existing securities are traded among investors, rather than being issued for the first time. This trading does not affect the issuing company directly, as the capital raised through the sale of shares occurs in the primary market, where new securities are created and sold to investors for the first time. Transactions in the secondary market provide liquidity for investors, allowing them to easily buy and sell shares according to their investment strategies. Furthermore, the secondary market plays a crucial role in price discovery, as the prices of securities are determined through supply and demand dynamics driven by investor sentiment and market conditions. While the primary market deals with the initial issuance of securities, the third and fourth markets refer to specific types of trading or methods of trading that can occur among institutional investors or through alternative channels. Thus, the secondary market serves a foundational role in the overall securities trading ecosystem, allowing for efficient and transparent trading of previously issued securities.