Primary Market Meaning, Features, Types
Investing in Stock Market
Primary Market (New Issue Market) Meaning
Primary market which is also called new issue market represents a market where new securities i.e. shares, debentures and bonds that have never been previously issued are offered. It is a market of fresh capital. The primary market is the entry market for companies and investors, where a company or institution that requires initial or additional capital sells its shares or financial instrument to the investors. For example, Initial Public Offering (IPO), public offer, rights issue and bond issue are done on the primary market. The primary market is also unique that the initial buyer is the only person who can exchange the securities for funds. When companies are willing to go for publicly listed on the stock exchange and wants to collect funds from general investors, they first sell their financial instrument in the primary market. Primary market is the first place for trading financial instruments including stocks and bonds.
There exist two types of primary market:
- Market where firms issue securities for the first time through Initial Public Offer (IPO).
- Market where firms which are already trading in secondary market raise additional capital through Seasoned Equity Offering (SEO).
Primary Market (New issue market) Features
1. It is a market for the new long term capital. It helps new company in capital formation.
2. It is the market where the securities are issued for the first time. It is also referred as new issue market.
3. In primary market, only buying of securities take place. Securities of company are sold directly by the company to the investors.
4. In primary market, capital can be raised in the form of IPO, Offer for Sale, Private placement, Right issue etc.
5. In primary market, price of securities are determined by the company considering the guidelines of SEBI.
6. The amount received by company after the new issue are utilised for expansion of existing business or setting up of new ventures.
7. Primary market has no particular place but the activity of bringing in new issues is called the primary market.
8. Primary market helps new company to create and improve their goodwill.
9. In primary market, the issuing company receives money and provides security certificates to its investors.
Primary Market (New Issue Market) Functions
The main function of a primary market can be divided into three service functions. They are: origination, underwriting and distribution.
1. Origination: Origination refers to the work of investigation, analysis and processing of new project proposals. Origination begins before an issue is actually floated in the market. The function of origination is done by merchant bankers who may be commercial banks, all India financial institutions or private firms.
2. Underwriting: When a company issues shares to the public it is not sure that the whole shares will be subscribed by the public. Therefore, in order to ensure the full subscription of shares (or at least 90%) the company may underwrite its shares or debentures. The act of ensuring the sale of shares or debentures of a company even before offering to the public is called underwriting. It is a contract between a company and an underwriter (individual or firm of individuals) by which he agrees to undertake that part of shares or debentures which has not been subscribed by the public. The firms or persons who are engaged in underwriting are called underwriters.
3. Distribution: This is the function of sale of securities to ultimate investors. This service is performed by brokers and agents. They maintain a direct and regular contact with the ultimate investors.