Tavagapedia

Primary Market

Key Takeaways

  1. The primary market is a type of capital market which deals with newly issued stocks or securities.
  2. Functions of Primary market – Origination, underwriting, and Distribution
  3. Methods of raising funds – Public Issue, Rights Issue, Private Placement, Preference allotment.

Primary Market Meaning

Primary market is the financial market in which a security is first sold by the issuer and bought by investors, before further changing hands (or owner). New bonds and securities issued in the capital market are issued by the primary market.

Primary market example

Equity shares of a company are sold for the first time in an IPO, the primary market in this case. For NFOs, the initial issue and distribution of investment fund units are done on the primary market. Bonds, when issued for the first time are subscribed in the primary market.

In the case of ETFs, the primary market is where the initial block unit is created by an AMC in lieu of the underlying securities that make up an ETF’s basket. At the other end of the primary market, are market makers, authorized participants, institutional investors.

Any large investor may also access the primary markets if looking to buy thousands of ETF units by nudging a creation unit-holder to release more ETF units.

Functions of primary market / What is the role of the primary market?

The main function of the primary market is to facilitate the company to raise long term funds by making fresh issues of shares or debentures.

  1. Origination –  Origination refers to the identification, assessment, and processing of newly issued securities.
  2. Underwriting – The banking institution acts as a middleman between securities issuing companies and investors. Underwriters example, JP Morgan, Goldman Sachs, Morgan Stanley, etc.
  3. Distribution – Distribution is selling securities to investors.

What is primary market and secondary market?

Primary market and secondary market

The primary market is a type of capital market which deals with newly issued stocks or securities. In the primary market, new securities are offered for the first time for sale to increase the capital. And because of that, it is also known as New Issue Market. In this market, the company sells the stocks directly to the investor. There are various intermediaries involved in a primary market, which includes merchant banks, brokers, debenture trustees, and portfolio managers.

The secondary market or the stock market, where securities are traded after they are issued to the public in the primary market. It means in the secondary market the investor purchases security from another investor. In the secondary market stocks or securities are traded which are already introduced in the primary market. The secondary market can include the stock exchange, equity market, and debt market. Here securities that are to be traded should be listed on the stock exchange, then only they are eligible for trading.

As earlier mentioned, in the primary market stocks are issued for the first time by the companies to raise capital, that is why it is also called as Initial public offering. By selling IPOs, companies or any other institutions raise funds in the primary market. In the primary market, the company is directly involved in trading, but in the secondary market, trading happens between investors, so there is no need for company involvement during the trading.

Features of Primary market

The main features of primary market are as follows:

  • Primary markets deal with new and initial issues of a particular security. Any issue of new securities by companies first float over the primary market
  • The primary market always comes before the secondary market with regards to the turn of transactions
  • The primary market has no physical existence like secondary markets exist in the form of stock exchanges
  • Primary markets have various methods of raising funds as discussed further in the article

Primary Market Instruments

Primary Markets typically deal with primary instruments. Primary financial instruments are financial securities whose price is directly referred to its market value. Common primary instruments include company stocks, bonds, currencies or any other cash-tradable security. On the contrary, derivatives are instruments that derive their value from an underlying, or another primary asset.

Primary markets do not deal with derivatives, such as futures and options. Derivatives and other secondary instruments are traded on stock exchanges or over-the-counter.null

Methods of raising fund in primary market – Types of Primary Markets

  1. Public Issue – This term occurs when a company issues new securities through IPOs. 
  2. Rights issue – Rights issue is for the existing shareholders to purchase additional new securities.
  3. Private Placement – This term refers to generating capital through selected investors.
  4. Preferential Allotment – Shares are allotted to the investor on a preference basis.

Primary Market in India

Primary markets form a crucial wing of capital markets. Similarly, primary markets exist in full force in India. The primary market in India is regulated by the Securities Exchange Board of India (SEBI). SEBI has listed various norms for issuing securities in the primary market, such norms have to be strictly followed by companies raising capital in the primary market. Primary markets also help the Government carry out its disinvestment programs.

The primary market of India was established in India after Independence in 1947. The market was regulated as per the provisions of the Controller of Capital Issues, 1947 Act. The Act had several structural issues that kept the markets from functioning efficiently and transparently. It was only post-liberalization and formalization of SEBI as a statutory authority in 1992 that India’s markets were equipped to raise large amounts of capital.