Future Business Leaders of America (FBLA) Securities and Investments Practice Test

Which market is characterized by exchange-listed stocks traded OTC primarily by institutional investors?

1. Second market

2. Third market

3. Fourth market

4. Primary market

The correct answer is: Third market

The market characterized by exchange-listed stocks traded over-the-counter (OTC), primarily by institutional investors, is known as the third market. This market allows institutional traders to execute trades directly with one another, often bypassing the traditional exchanges. Transactions in the third market typically involve large blocks of stocks that are listed on an exchange, making it appealing for institutional investors who seek to reduce trading costs and maintain a degree of anonymity. In contrast, other markets have distinct functions and characteristics. The primary market is where new securities are issued and sold directly to investors via public offerings, while the second market refers to the trading of previously issued securities on exchanges. The fourth market, on the other hand, involves direct trading between institutional investors that occurs without the intervention of brokers or exchanges, often utilizing electronic trading systems. Understanding these distinctions can help in comprehending the roles each market plays in the overall financial system and how institutional trading can influence price formation and liquidity in different contexts.