Market Efficiency-Primary market question

CFA Level I Equities
#1

Hi,

Could anyone help me understand why the below question, picks the answer “b” as the question is not saying, the company is offering “the first time shares to the public or IPO”? Shouldn’t it be Secondary market?

An oil and gas exploration and production company announces that it is offering
30 million shares to the public at $45.50 each. This transaction is most likely
a sale in the:
A futures market.
B primary market.
C secondary market.

B is correct. This transaction is a sale in the primary market. It is a sale of
shares from the issuer to the investor and funds flow to the issuer of the security
from the purchaser.

#2

Secondary market is where only investors trade. And the money will not flow to the issuer.

For primary market, whether it is IPO or secondary offering, the issuance proceeds flows from investors to issuer.

1 Like
#3

Thanks millions, very much appreciated the clarification.

1 Like
#4

Secondary Offering it`s a shelf registration?

#5

A shelf registration can be primary offering or secondary offering (but this is not stated in textbook).

A secondary offering does not have to be a shelf registration. It could be a separate issuance of new securities to the public.

#6

The language of finance can be tricky at times.

A company making a secondary offering does so in the primary market, not the secondary market:

  • When applied to an offering (i.e., a company issuing its stock to investors), “primary” means the first time the company issues stock and “secondary” means any subsequent time the company issues stock.
  • When applied to markets, “primary” means a company is issuing stock to investors and “secondary” means investors trading (already-issued) stock amongst themselves.
#7

Thanks so much for further explanation!

I realize that I am being tricked by the language in other questions even though I know the material. May be, just need to read the question a couple of times.

Have a lovely day.

#8

Please understand that it is not CFA Institute’s intention to trick you. They try very diligently to make their questions straightforward.

The problem here is that the finance industry can be very sloppy in its language, and CFA Institute is obligated to use the finance industry’s language.

#9

Thanks. May be, I am stressing out and reading the question fast as half way to the material so far…