The primary market is where organisations issue new securities to the general public. It is also referred to as the new issue market and the entire process is called Initial Public Offering in the case of equity. But it involves issuing debentures or bonds in debt instruments. Strict regulations govern the primary market, and the companies offering these securities first file their statements with the SEBI or the Securities and Exchange Board of India before conducting any sale. Therefore, let’s find out more about how the primary market works and what it involves in the following sections.
Types of Primary Market Issuance
An investor can purchase security from the following kinds of primary market issuances:
Private Placement
A private placement is where an organisation offers its securities to a small bunch of investors. These securities can be stocks, bonds, or something else, and the investors can be both institutions and individuals. Private placements have fewer regulatory stipulations, so they are easier to issue. It further allows the company to be private while putting in less time and reducing costs.
Public Issue
One of the most common methods for issuing securities to the public is through public issues. The securities are listed for trading in the stock exchanges. A private company transitions into a publicly traded organisation when its shares are offered to the public. It allows the company to get the funds needed to improve infrastructure, expand its business, repay debts, and meet other goals.
Qualified Institutional Placement
Another kind of private placement is qualified institutional placement. Here, a listed organisation issues its securities in the form of equity shares or wholly or partly convertible debentures. These can be bought by qualified institutional buyers who have the needed expertise and knowledge to invest in the capital market.
Preferential Issue
One of the quickest ways of raising capital for an organisation is through a preferential issue. Both unlisted and listed organisations can issue convertible securities or shares to a certain bunch of investors. At the same time, the preferential issue is not a rights issue or a public issue. The people who have preferred shares can get the dividend before the ordinary shareholders are paid.
Rights and Bonus Issues
A company issues securities to its existing investors at a predetermined price in this kind of primary market issuance. They are also allowed to take advantage of further free shares in case of a bonus issue. Investors can purchase stocks even at a discounted price for rights issues within a specific time. The rights issue increases the existing shareholders’ control over the company, and there are zero costs involved in the share issuance. However, a company can give away stocks as a gift to its shareholders for bonus issues.
Functions of the Primary Market
The primary market has the following functions:
Investor Participation
The primary market is great for institutional investors and individuals to become stakeholders in any organisation or even be creditors to government institutions. It leads to an inclusive financial market and broadens the investor base.
Capital Formation
The primary market’s main function is to help government entities and companies raise capital. The capital is used for numerous purposes and meets the operational needs.
Facilitates Economic Growth
The primary market contributes to boosting the economy by allowing companies to get the necessary funds for development and expansion. It motivates innovation, job creation and entrepreneurial spirit.
Price Discovery
The primary market’s initial sale of securities assists in understanding their fair market value. Factors like industrial trends influence the price structure, the company’s financial health, and market conditions.
Wrapping Up!
Investing through the primary market has several benefits, including transparent pricing, capital infusion, profit potential, etc. At the same time, one can make the most out of the primary market when one understands every side of the coin. It has benefits, but it also has market risks and a lack of liquidity. And it also tends to show volatile performance initially. So, the primary market is the best for experienced investors who can balance both the positive and the negative.
FAQs About What is a Primary Market
1. How is the primary market different from the secondary market?
The primary market is about allocating new securities to investors. The secondary market is a trading place for previously issued securities. They have different purposes and transactions as well.
2. What is the primary market’s purpose?
The primary market is a place where government entities, companies and investors come together to trade new securities. It’s where new securities are launched, and investors can purchase them directly from the issuer.
3. What affects the performance of newly issued securities in the primary market?
The primary market is prone to be affected by several economic factors, including geopolitical events and industry-specific challenges. These then affect the securities’ performance and profitability.
