What is meant by Primary Market? | Definition, Types, Function & Features

Primary Market

Primary market is the segment of capital market, As we know in the capital market people can do buying and selling of financial securities likes, Equity, Bonds, commodities, currencies etc. So in primary market what makes the difference? let see…

In a primary market, new securities are issued for the first time to investor for trade, that means the new securities are offered for sale to the investor in a first time in the market. The investors are directly connected with the companies where they can do buying and selling of securities for the first time. Let’s take an example:

When a company need to borrow the money from the public then they can issue an IPO to public in exchange of equity. IPO is a Initial Public Offering, where the first time any companies share their equity to the investor. This is a basically a “Primary Market”.

Definition of Primary Market

Primary market is a form of capital market where the securities are issued for the first time to the public/investor by the company is known as “Primary Market”.

Types of Primary Market

For expanding the business there is a need lot of capital, So how to get a capital to expand the business?. Basically, There are two ways 1) Debt Financing, means that taking loan from banks and use it for expanding business or 2) Equity Financing, means that selling of securities to the public/investor in exchange of borrowings. In this market Equity financing is the best way, To borrow from public companies/business need to issue their “shares” to public via IPO, FPO, Private Placement, Qualified Institutional Placement etc. These are the types of primary market, so now let’s see these topic in detail…

IPO

IPO is a “initial public Offering” in which the companies can issue their securities to the investor for raising money from the public. In IPO the price determination of companies shares are done by the investment banks, they provide a lot price bracket where investor choose the lot and apply for the IPO.

FPO

FPO is a “Follow on Public Offer”. In FPO, if any already listed companies needs more funds from the public after IPO then they can issue more securities to public so that company can fulfil their fund requirement. This type of raising fund from public is known as “FPO”.

Private Placement

Private placement is the another & easier method than IPO to raise funds from the investor. The term “private placement” means that when the company issue their securities for the selected group of person is basically known as private placement. In this placement institutional & individual investor both can participate and make their investment in the companies but only selective investor.

Qualified Institutional Placement

The term “Qualified Institutional” already said that this placement is only for the big institutions only there is no retail investor can make their investment in it. So the qualified institutional placement is like the private placement but in this placement companies issue their securities only for the institutional investor like: Venture Capital, Mutual Fund, Pension Fund, Commercial Banks etc.

Right Issue

If a company needs more funds from the investor then the company can issue FPO for more fund as we already discuss but in case of right issue companies gives the right to the existing shareholder to buy their more securities at a discounted price than the market price.

Bonus Issue

In bonus issue company no need to raise funds but instead of getting funds they can issue the bonus or we can say gift to their existing shareholder, the bonuses are in the form of more shares or dividend. Company gives bonus only when the company made some good profit in the financial year.

Functions of Primary Market

  • Issuing new shares: In a primary market, issue of new shares to the public is the main & Important role of this market. Companies can issue their shares to the public via IPO or via many other ways etc.
  • Organization: In this market there is a lot of work or complex things like analysis, investigation, project proposal etc. So the companies must have to organize these things otherwise it’ll create so many problems for the company. To organizing the things are too difficult that’s why the organization of things are done by the merchants banks like Investment Banks.
  • Distribution of new shares: After issuing the shares, after organizing all the things, now companies have to distribute their share to the public. The process of distributing to the public is done with the help of agent called “broker”, broker is a intermediary between the company and investor. where he helps the company to distribute all the shares to the public/investor
  • Underwriting services: This is also the important function of this market. After issuing the securities by the companies there is a also possibility where no one investor want to make investment in that company. So in this case this function of this market help the company to sell their securities likewise there are many institutions(also known as Underwriters) are there who gives promises to the company before issuing their securities is that if no one can buy your securities then we can buy your all shares.

Features of Primary Market

  • This is the market where the securities are issuing for the first time by the company & this market is also known for “New Issue Market”
  • In a primary market the investors are directly connected with the company.
  • It is a market for long term where investors can holds the companies securities for a long period of time.
  • This market welcomes all investors like individuals, Institutions even 18+ new investors to invest in this market.
  • It is the best place for borrower and as well investors, if we talk about borrower they can take money from the investors but in exchange of shares, on the other hand investor can make their wealth by buying the securities of the companies.
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