What is Primary Market ?

What is primary market?

What is Primary Market ?

Primary market: Primary market is the market where securities are created for the first time for the investor to purchase. In primary market new securities are issues through stock exchange, enabling the firms and government to raise capital. There are three entities involved in primary market. It include company, investors and underwriters. In primary market security are issued as an (IPO) initial public offering and a sale price of these issue is determined by concerned underwriter. The security which are purchased by investors in primary market, such market is regulated by (SEBI) security exchange board of india.

Intermediaries of primary market:

• Merchant banker
• Broker and banker to issue
• Stock exchange
• Underwriters
• Credit rating agencies
• Debenture trustees
• Banker to issue

Functions of primary market:

There are three function of primary market

1)New issue offer:

This is one of the major function of primary market, that it organise offering of new share which has not been traded on any other exchange before. That is why primary market is also called as new issue market.

2)Underwriting Services:

Underwriting is an essential facet while offering a new issue. The role of underwriter in primary market is to purchase unsold shares if it cannot manage to sell the required number of shares to the public.

3)Distribution of New Issue:

This is another important function of primary market. In primary market new share are distributed and a distribution is initiated with a new prospectus issue. Large number of public is invited to purchase the new issue, and detailed information is given on the company and the issue along with the underwriters.

Types of primary market issues:

PUBLIC ISSUE:

It is the most common method of issuing security of company to the public. A company enters the capital market to raise money from kinds of investors. Here, the securities are offered for sale by the company to new investors and It is mainly done via Initial Public Offering (IPO). The further classification of public issue is-

(IPO) Initial public offer: It is fresh issue of equity share by an unlisted company for the first time or in other words it is a process by which a privately held company becomes a publicly-traded company by offering it share to the general public. After the process of listing, the company gets its name listed on the stock exchange.

(FPO) Further public offer: it is the process by which the company raise additional capital from the investors to meet the company’s need for running their operations or execute their expansion plans.

Private placement:

Private placement is the type of issue in which the company offer its securities to a small group of investors. The securities can be bonds, stocks or other securities, and the investors can be both individual and institutional. Private placements are easier to issue than IPO as the regulatory stipulations are significantly less. The private placement is suitable for startups as it reduces cost and time. The company can raise fund through an investment bank or a hedge fund.

Preferential issue:

Preferential issue is the method used by the company to raise capital in short period of time or in other word it is the fastest method for a company to raise capital. Note that the preferential issue is not a public issue or a rights issue.

Qualified institutional placement:

Qualified institutional placement is the private placement, where the listed company issues equity shares or debentures (partly or wholly convertible) or any other security. Qip was launched by SEBI so that it allow the listed companies to raise capital through the issue of securities to qualified institutional buyers (QIBs).

Rights issues: Right issue is the type of issue in primary market in which the company issues shares to its existing shareholders by offering them to purchase more or to purchase additional shares at discount price. It is a method for a listed company to raise additional capital.

Bonus issues:

A bonus issue, also known as a capitalization issue, under bonus issue company offer free additional shares to its existing shareholders. A company can decide to distribute additional shares as an alternative to dividend payout.

Advantage and disadvantage of primary market

Advantage of primary market:

• In primary market companies can raise capital at low cost
• In primary market price manipulation is low
• In primary market investors do not have to pay brokerage, transaction fees and stamp duty
• In primary market there are no market fluctuation.
• In primary market capital can be raised through sale of treasury bonds.
• There is high liquidity in primary market because security which are issued in primary market can be sold immediately in the secondary market.

Disadvantage of primary market:

• In primary market money gets locked for the long time
• In primary market traders do not get historical trading data.
• In primary market when the shares are oversubscribed, the small investors do not get any allocation.