Question

1a. In your local Ford retailer, both a primary and a secondary market are in action. Explain. Is the Ford retailer a dealer or a broker?

b)What does it mean to sell a security short? Why might you do it?

Answer 1

1. A primary market is one in which brand new cars are sold where as a secondary market is one in which used cars are sold. In the first case the Ford retailer acts as a dealer since it is selling new cars from the company. In the second case the retailer is acting as a broker since it will be acting on behalf of the person who wants to sell his used car.

2. Short selling of a security refers to sale of security which a seller has borrowed. It implies selling the security before buying it. The seller profits from the sale if the price of the security declines since he is able to sell at first at a higher price and then purchase the security later at a lower price. The difference will be the profit or gain of the investor. This is a good strategy if the person expects the prices of the security to decline.