Updated Mar 24, 2022

What is Primary Market?

What is Primary Market?

Financial resources are made available to organisations in many sectors of the economy by purchasing debt and capital securities in the primary market.

To begin trading on the stock market, a firm must first raise an Initial Public Offering (IPO). A primary market is sometimes known as the New Issue Market since securities are offered here first.

In an initial public offering (IPO), the firm offers its stock to the general public on the open market. When new stock is sold to investors in an IPO, the procedure is known as underwriting which is also used to raise investment cash.

Features of Primary Market

• The securities are issued to investors directly by the firm, which is a characteristic of primary markets.
• As soon as the money is received, it is distributed to the investors in new securities.
• Companies leverage the key markets to open new locations.
• To grow or modernise the current commercial ventures/businesses.
• The primary market plays a critical role in the creation of new capital in the financial system.

The primary market's roles

A few of the main market's most important features include the following:

• Offer for a New Edition

There are several essential roles in the market here. This market is responsible for arranging the sale of a new issue that has never been exchanged on any other exchange. The main market is sometimes referred to as the new issue market for this same reason:

New offers need careful preparation. As part of the process, a project's feasibility is thoroughly examined, with factors including the promoter's overall debt, solvency ratio, and profitability ratios all being taken into account.

• Financing Options

Underwriting is amongst the most critical parts of launching a new issue. In the main market, an underwriter's job is to purchase shares that have not yet been sold. Financial firms often take underwriters' positions, raising a fee for their efforts.

In many cases, investors rely on underwriters to determine whether the risk is worth the reward. Alternatively, the underwriter may purchase the full IPO issue and then resell it to the public.

• Dissemination of the newest edition

The main market also plays an important role in this regard. A new prospectus is issued to begin the distribution process.

Purchases of the new issue are encouraged, and comprehensive details on the firm, the issue, and its underwriters are all provided.

Types of Issuance in the Primary Market

Investors may buy securities in the primary market in various ways after they are issued. In order, they are as follows:

Public Issues

Offering securities to the general public using this manner is quite prevalent. After corporations obtain funds via an initial public offering (IPO), the securities are listed on a stock market and made available for trade.

Private Placement

One of the most common ways to raise capital is via private placement. It doesn't matter whether these principal securities are stocks, bonds, or something else. Institutional or individual investors may participate in private placements.

Qualified Institutional Buyers

Listed firms may raise money via the issuance of primary securities to appropriately qualified institutional purchasers using this capital raising method (QIBs). The financial market regulator SEBI launched it to make it simpler for enterprises to raise money domestically.

Rights and Bonus Issues

A new sort of primary market issue has been added to the mix. In a rights issue, the firm allows current investors to purchase more assets at a predetermined price; in a bonus issue, the company allows investors to receive allotments of additional shares at no cost.

Primary Market Advantages

First, let us look at some of the benefits that come from the main market.

A Low-Cost Method of Funding

Companies may easily and cheaply obtain cash for their operations in a primary market. The secondary market also provides high liquidity since assets supplied in the primary market may be sold relatively instantaneously.

Price Manipulation is less likely

Price manipulation is less likely in the main market than in the secondary market. Transparency and efficiency improve.

Provides Variety

Investors may reduce risk by diversifying their risk exposure by using the primary market as a viable channel. Investors may diversify their portfolios across asset classes and financial products.

Conclusion

The primary market is where new securities are created to be sold to investors for the first time. The primary market issues new securities on an exchange to allow companies, governments and others to raise capital. There are three players in a typical primary market transaction - the company issuing the new securities, investors who purchase them, and the underwriting firms that oversee and facilitate the offering.