ACCA Advanced Financial Management (AFM) Practice Exam

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What is the primary function of the secondary market?

To issue new financial securities
To provide financial advice to investors
To facilitate the trading of existing financial securities
To regulate financial institutions

The correct answer is: To facilitate the trading of existing financial securities

The primary function of the secondary market is to facilitate the trading of existing financial securities. This market is essential for providing liquidity to investors, enabling them to buy and sell securities after they have been initially issued in the primary market. The secondary market allows investors to switch investments, adjust their portfolios, and access cash by selling securities they own. When securities are traded in the secondary market, their prices fluctuate based on supply and demand dynamics, reflecting current market conditions. This helps to determine the market value of those securities and aids investors in making informed decisions. In addition, the existence of a robust secondary market enhances the attractiveness of securities in the primary market because investors are more likely to purchase securities when they know they can sell them later if needed. Thus, the secondary market plays a vital role in the overall functioning of the financial system, providing confidence, liquidity, and price discovery.