a) What is the difference between primary and secondary markets?
Primary market is where securities are issued/traded in the first instance e.g.
new co-share issues.
Secondary market deals with subsequent trading of securities
which have already been issued. Comprises bulk of trading in
financial markets.
b) Outline 2 benefits of each.
Primary Market –
• Direct Fund raising for companies
• Strict Corporate Governance procedures for initial listing
Secondary market
• A capital market for the trading of marketable securities
• Strict Corporate governance procedures for companies listed in a
secondary market
c) Identify 3 types of finance that a firm could use to fund a new project.
d) Identify and explain 1 benefit and 1 disadvantage for two types of finance
for either the firm or the investor.
Advantages Disadvantages
Debentures • Tax deduction of
interest
• No dilution of
• Increases Financial
risk
Return
Rm
Rf
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ownership
Preference Shares • Security over
ordinary shares as
defined dividend
and usually
preferential in
liquidation
• Can be no
participation
therefore no claim
on profit above
scheduled dividend
Ordinary Shares • Reduces Financial
risk
• Dividends no
legally required
• Dilution of
ownership
• No tax Shield
Any other type of debt
or equity