What is Primary Market?

5paisa Research Team Date: 21 Apr, 2023 04:32 PM IST

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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. 

Functions of Primary Market

Given below are the fundamental functions of the primary market. 

Underwriting Services 

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 organizing 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- 

Public Issue 

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 Placement 

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. 

Preferential Issues 

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. 

Examples of Primary Stock Market Selling

Here are two major primary market examples:

Facebook- Facebook's initial public offering is among the noteworthy IPOs that have taken place. The largest IPO in the technology industry to date was the one that started in 2012. The company's first public offering was a success, raising $16 billion. Its turnover, therefore, grew by over 100%. Moreover, there was strong demand for shares in the primary market, which forced the underwriters to set the price of Facebook's stock at $38 per share. The final stock valuation reached $104 billion, the largest for a newly established public corporation.

Coal India- In 2010, Coal India conducted the largest IPO in India, raising Rs 15,200 crores. The shares first traded at Rs 287.75 before rising to Rs 340. Retail investors and the company's subsidiaries and staff were given a 5% discount off the final IPO price.
Also, the sale of a portion of the government's ownership share in Life Insurance Company was suggested in the Union Budget 2020-2021. The government may earn Rs. 80,000 crores from selling even 10% of its stock. The listing of the insurer will overtake Coal India's IPO to become India's largest initial public offering.
 

Advantages of Primary Market

Now that you know what is primary market, here are some advantages that you should know:

●    Due to the ease with which these securities may be sold in the secondary market, companies can obtain money at a very cheap cost. As a result, the securities issued in the primary market have high liquidity.
●    Primary markets play a crucial role in an economy's ability to mobilize savings. Savings from the community are tapped into investment in different ways. These funds are options for investing.
●    Price manipulation is much less likely to occur on the main market than on the secondary market. By deflating or inflating a security's price, manipulations like this impact the fair and free operation of the market.
 

Private Placement and Primary Market

Other primary market stock offers include preferential allotments and private placements. Without exposing their shares to the public, firms can sell directly to larger investors like banks and hedge funds through private placement. Shares are offered to certain investors (often banks, hedge funds, and mutual funds) through preferential allocation at a discounted rate not accessible to the general public.

Similar to corporations, governments can issue new long- and short-term bonds on the primary market to raise debt money. The interest rates at the time of issuance, which may be greater or lower than those given by existing bonds, are used to determine the coupon rates for newly issued bonds.
 

Conclusion

The primary market meaning indicates a symbolic setting where new bonds and stock certificates are created and offered for the first time for sale to investors. They are offered for sale by the businesses, governments, or other organizations that issue them, sometimes with the assistance of investment banks who underwrite the new issues, determine their price, and manage their introduction. Anyone might decide to invest in the market after carefully considering this information about the primary market. It also paves the way for the development of a risk-diversified investment portfolio.

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