Advanced Diploma of Financial Planning (ADFP) Practice Test

What is the secondary market in finance?

1. A place where new securities are created

2. The market for buying and selling previously issued securities

3. A restricted market for government bonds only

4. A segment for high-risk investments only

The correct answer is: The market for buying and selling previously issued securities

The secondary market in finance is fundamentally the market where previously issued securities are bought and sold. Once securities such as stocks or bonds are issued in the primary market where they are created and sold to investors for the first time, they enter the secondary market. Here, investors can trade these securities among themselves. This trading can occur on exchanges or in over-the-counter markets, allowing for liquidity and price discovery based on supply and demand. In contrast, the other choices do not accurately describe the secondary market. The first option pertains to the primary market, where new securities are created and sold for the first time. The third option limits the market to government bonds, which does not encompass the broader range of securities traded in the secondary market. Finally, the last option suggests that the secondary market only involves high-risk investments, whereas the reality is that a wide variety of securities, ranging from safe blue-chip stocks to high-risk assets, are traded in this market. Therefore, the description of the secondary market as a place for buying and selling previously issued securities accurately captures its main function in the financial system.