Question

1. Discuss why the secondary markets are critical to firms who want to raise capital given that firms raise capital in the primary markets and not the secondary markets. To get full credit, you need to clearly explain your answer. Note that while there is more than one viable reason, you need to only address one reason – just address it well.

Answer 1

DETERMINATION OF DIRECTION OF GENERAL ECONOMY AND STOCK MARKET-

Secondary market are critical for companies who are issuing with their initial public offering because secondary market will be providing them with an idea about the direction of the stock market and direction of the economy because it is often said that stock market is an indicator of the economy and these new companies who want to list themself will likely to list them self on the stock exchange when they will believe that there is a sound economy and there is a bull run in the stock market,because it will be helping them in order to fetch high premium because of higher liquidity and higher demand in the market so they will be looking for a strong economy and strong stock market where the demand is high and there is higher liquidity and there is enough willingness to invest so their initial public offering will be oversubscribed by a high premium so they will be trying to exploit this opportunity of the Bull run and they will list themselves at a higher price so secondary market will provide the sense of economy to these companies who wants to list them shares on stock exchanges even though they sre issuing their shares in the primary market