What is Primary Market: Functions & Types | Espresso

What is Primary Market?

The primary market is known as the segment of the capital market. Here, entities like governments, companies and various other institutions get funds through equity-based securities and the sale of obligations.

The primary market is where new securities are created and sold to investors for the first time. This includes both stocks and bonds. Companies and governments sell securities in the primary market to raise money for new projects, expand their businesses, or pay off debts.

Investment banks typically play a role in primary market transactions. They help companies and governments set the price for their new securities and market them to investors. Once all of the securities in an offering have been sold, the primary market closes for that security.

Here is a simplified analogy:

Imagine that you are opening a new restaurant. You need to raise money to buy equipment, hire staff, and rent a space. You decide to sell shares of your restaurant to investors in a primary market offering.

Investment bankers will help you to set the price of your shares and market them to potential investors. Once all of the shares have been sold, the primary market offering will close.

Your shares will then begin trading on the secondary market, where investors can buy and sell them among themselves.

You may have the opportunity to buy shares of new companies at a discounted price.
You may be able to invest in companies that are not yet listed on the secondary market.
Disadvantages of investing in the primary market:

There is more risk involved in investing in new companies, as they have not yet established a track record.
It may be difficult to sell your shares if the company does not perform well.

Overall, the primary market can be a good way to invest in new and growing companies. However, it is important to understand the risks involved before investing.

Published on 01 March 2023

When the business aims to go public for the very first time by raising an IPO [Initial Public Offering], which is done at the primary market. Since all the securities get sold for the first time in that market, it also goes by NIM or New Issue Market.

During the Initial Public Offering, the business sells the shares to the investors directly within the Primary Market. The whole process of raising the investment capital by selling the new stock to the investors right through the IPO is called underwriting.

Various Types of Primary Markets

Now that you know ‘what is primary market’, you should also get to know about the different kinds of primary markets that are available. Since there are many of them available, it's not possible to mention all of them. For such reasons, you can learn about the main ones in this section.

1.      Private Placement

Private placement takes place when a business provides securities to a small unit of investors. These securities can come in bonds, stocks or any other security. Under private placements, investors can either be individual or institutional.

You can easily issue a private placement compared to the IPO because the regulatory norms are low. Besides that, private placement can also incur reduced time and cost. This type of primary market is ideal for firms that have just started their operations and are in their formative years.

2.      Qualified Institutional Placement

This is another fundraising tool utilized by all the listed businesses to raise capital by providing the primary securities to the QIBs or Qualified Institutional Buyers. SEBI, a capital market regulator, introduced QIBs to make things easier for all businesses that wish to raise capital within the domestic market.

Remember, all QIBs are investors with the financial knowledge and expertise to invest within the capital markets. In general, they are internal institutional investors registered with public monetary institutions, SEBI and scheduled commercial banks.

3.      Preferential Issues

When it comes to the primary market, this is one of the quickest of its kind. Through preferential issues, businesses can easily raise capital for themselves. Here, you will come across both the unlisted and listed businesses that can issue securities for a particular group of investors.

It’s crucial to note that preferential issues are not rights or public issues. Under this kind of issue, the preferred shareholders get paid dividends before the ordinary shareholders.

4.      Bonus and Rights Issues

This is another issuance within the primary market where all the companies issue securities to the current investors. They do so by enabling them to purchase securities at a pre-fixed price. During the rights issue, investors can buy stocks at a discounted or lower price within a specific period. Besides that, for the bonus issue, the company’s stocks get issued to its current shareholders.

Functions of the Primary Market

There are numerous functions of the primary market, and some of them are:

1.    Provides New Issue

The primary market will enable the offering of new issues not traded previously in other exchanges. When you organize a fresh issue market, you need to conduct a proper evaluation of the project’s feasibility.

The fresh issue market is also known as the new issue market. All the monetary arrangements are made for this purpose, and you need to take the foreign exchange demand, liquidity ratio, promoter’s equity, and debt-equity ratio into account.

2.    Underwriting Services

Underwriting is viewed as one of the most vital things when launching a new issue. Underwriters take up the responsibility to acquire all the unsold shares within a primary market when the business can’t sell the needed shares.

All financial institutions can also earn underwriting commissions by playing the part of the underwriters. To determine whether reaping the rewards or taking up risks is worth it, the investor heavily relies on the underwriters. The IPOs can also be bought by the underwriters who sell them off to the investors.

3.    Distribution of New Issue

The new issues get distributed within the main marketing arena. All these distributions start with the issuance of the new prospectus. In it, the public gets invited to buy a new issue along with detailed information on the firm, underwriters, and the issue itself.

Ending Note

With this information on the primary market, people can make a proper decision when investing. It also leads to the creation of an investment portfolio with the help of diversified risks. This market is ideal for all those businesses who wish to go full-public with an IPO.

Chandresh Khona
Team Espresso

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