Understanding Primary Market
The primary market refers to a portion of the capital market wherein companies, institutions, governments, and other entities attain funds through selling debt and equity-based securities. When a corporation chooses to go public by raising an IPO (initial public offering) for the very first time, it is done in the primary market. The securities are primarily sold for the very first time due to which, a primary market is also referred to as the NIM (New issue market).
During this IPO, the corporation focuses on selling its shares to the investors directly in the primary market. This process of boosting the investment capital through selling new stock to traders through Initial Public Offering is called underwriting.
On selling these shares, the sales are further purchased and sold by investors in the secondary market.
Different Properties and Functions of Primary Market
Given below are the fundamental functions of the primary market.
Underwriting is one of the most pivotal elements of providing a new issue offer. An underwriter has the role of buying unsold shares in a primary marketplace. Most often, financial institutions act as underwriters and earn a commission in this process.
Investors furthermore entirely depend on underwriters for determining if taking the risk is worth the returns. The underwriter may also purchase the entire IPO issue, thereby selling it to the investors.
New Issue Offer
A crucial function of the primary market is new issue offer. The market is responsible for organising the offering of new issues that haven’t been traded in previous exchanges. This is the reason why primary markets are also known as new issue markets.
Issuing a new offer is a rather comprehensive process. It consists of a detailed evaluation of a project’s viability and the financial arrangement includes considering the promoter’s liquidity ratio, debt-equity ratio, equity ratio, and so on.
Distribution of New Issue
The distribution procedure involves a new prospectus issue. Here, the public is invited in huge crowds for buying the new issue. Furthermore, insightful data is given to the corporation, along with the underwriters.
Types of Primary Market Issuances
On issuing the security, investors are liable to buy shares in distinguishing ways in the primary market such as-
This is a popular method involved in issuing securities to the public in bulk. It is generally done through an IPO, wherein corporations increase capital for their business. These securities are further available for trading on the stock exchange.
The primary market allows a private limited corporation to become a publicly-traded entity via IPO. Moreover, the capital increased by a corporation can be positioned and structured to boost the company’s current infrastructure and further repay debts.
Private placements take place when a corporation gives securities to a rather small group of investors. The primary securities offered can be bonds, stocks, or other security types. Investors have the choice to be individual or institutional in private placements.
Issuing private placements is comparatively easy than an IPO. This is because the regulatory norms here are primarily less. Moreover, it promotes reduced costs and time.
This is one of the fastest ways that companies make use of raising capital for their businesses. Both listed and unlisted corporations are liable to issue security to a certain group of traders.
Preferential issues aren’t public or rights issues. This type of issue involves paying dividends to the preferred shareholders before the ordinary shareholders.
Qualified Institutional Placement
This is a fundraising tool that is utilised by certain listed corporations for raising capital solely by issuing primary securities to QIBs (Qualified Institutional buyers). This was introduced by capital market regulator SEBI to ease raising capital for companies in the domestic market.
QIBs are traders that contain financial knowledge and requisite expertise for investing in capital markets.
Rights and Bonus Issues
In this type of issuance, the corporation issues securities to the pre-existing investors. This is done by letting the investors purchase more securities at an already fixed rate. They can further attain allotment of additional shares in situations of bonus issues.
As for the rights issue, investors can buy stocks at a discounted price under a certain timeframe. As for the bonus issue, on the other hand, a company’s stocks are primarily issued to its existing investors.
Investing in stocks requires having abundant information on what exactly stocks are and which type of investments you should make. Make sure to watch out for the primary market when investing in stocks. IPOs offer exceptional potential for giving huge returns to investors. This is everything you needed to know about the primary market and the types of the primary market.