Question

Firms raise capital from investors by issuing shares in the primary markets. Does this imply that corporate financial managers can ignore trading of previously issued shares in the secondary market?

Short answer

No. The secondary market is still important to its managers

Step-by-step solution

Definition

A market where new issues of securities are offered to the public is known as the primary market. In secondary markets, previously issued securities are traded amongst investors.

Explanation

Even if a firm doesn’t raise capital from investors by issuing shares, the secondary market is still important to its managers. It is through this market, that the managers gain important information and insight into the market about its investment projects. If the managers see a considerable increase in the stock price, they might take this as a signal of the market’s belief in the firm’s investment. They can use this clue to proceed with or expand the investment.

The trading option of primary stocks in the secondary market also gives investors the opportunity to sell it to raise the money in equity at better rates.