Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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Which market is not typically associated with Initial Public Offerings?

Primary market
Secondary market
Third market
Fourth market

The correct answer is: Fourth market

The fourth market is primarily composed of institutional investors trading directly among themselves, typically in over-the-counter (OTC) transactions. This market is not associated with Initial Public Offerings (IPOs) because IPOs specifically occur in the primary market, where new shares are issued and sold to investors for the first time. In contrast, the primary market is the correct venue for IPOs, as this is where securities are created, and companies raise capital by offering their stock to the public. The secondary market is where investors buy and sell securities that have already been issued, which is after the IPO has taken place. The third market involves the trading of listed securities in the OTC market, which can include transactions after the initial public offering but does not serve the direct function of new capital formation like IPOs do. Thus, the fourth market does not participate in the IPO process, as it caters to a very specific type of trading that is distinct from the activities surrounding an initial public offering.