Financial Industry Regulatory Authority (FINRA) Practice Exam

The essential difference between a primary distribution and a secondary distribution lies in the source of the shares being sold. A primary distribution refers to the sale of newly issued shares offered directly by the issuing company to raise capital. When companies want to raise funds for various purposes—such as expansion, paying off debt, or boosting working capital—they conduct a primary distribution by creating and selling fresh shares to investors. This process effectively increases the total number of shares outstanding in the market.

In contrast, a secondary distribution involves the sale of shares that have already been issued and are owned by existing shareholders, such as private investors or insiders. In this scenario, the company does not receive any proceeds from the sale, as the transaction is between current shareholders and new investors. The number of shares outstanding does not change in this case; rather, the ownership of existing shares is transferred.

Recognizing this distinction between the two types of distributions is crucial for understanding how companies raise capital and how market dynamics can change based on new equity supply. The other choices, while presenting certain features about primary and secondary distributions, do not accurately capture the fundamental difference centered on the issuance of new versus existing shares.