Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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True or False: Stabilization is designed to artificially raise the price of a new issue.

True
False
Only for initial public offerings
Only for secondary offerings

The correct answer is: False

The assertion regarding stabilization in the context of new issues is focused on its purpose and methodology in the securities market. Stabilization refers to the practice used by underwriters to support the price of a security immediately after it is offered to the public, particularly during the initial period of trading. This process aims to prevent the price from falling below the offering price and to maintain a stable market for the new issue. However, it does not seek to artificially raise prices beyond the reasonable market value or create an excessively inflated price. Instead, stabilization is meant to provide a buffer against price volatility, allowing the market to absorb the new issue without sharp declines. Therefore, indicating that stabilization is designed to artificially raise the price of a new issue is inaccurate. The primary objective is to facilitate orderly trading and maintain confidence in the security’s value while it establishes itself in the market.