Primary Market¶
The primary market is a crucial component of the capital market that facilitates the raising of additional funds by governments, companies, and institutions through the issuance of debt and equity-related securities. Securities in the primary market encompass a wide range of financial instruments, including notes, bills, government bonds, corporate bonds, and company stocks.
Features of the Primary Market¶
The primary market possesses distinctive features that set it apart from other financial markets:
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New Securities Issuance: The primary market deals exclusively with the issuance of new securities. Any share, bond, exchange-traded fund (ETF), or marketable security is first introduced in the primary market before entering the secondary market.
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Absence of Physical Existence: Unlike the secondary market, which operates through stock exchanges with physical trading floors, the primary market has no physical existence in the form of stock exchanges. It primarily functions through financial institutions and underwriters.
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Precedes the Secondary Market: Securities are floated on the primary market before they become available for trading in the secondary market. The primary market, therefore, precedes the secondary market in the lifecycle of securities.
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Various Capital Raising Methods: Companies and institutions can utilize different methods to raise capital in the primary market. These methods include Initial Public Offerings (IPOs), offers for sale, private placements, rights issues, and Electronic Initial Public Offerings (E-IPOs).
Functions of the Primary Market¶
The primary market serves several essential functions, involving key entities such as the company, investors, and underwriters:
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New Issue Offer: In the primary market, new issues refer to securities that have never been traded on other exchanges and are now offered for the first time. Establishing a new issue market involves a range of responsibilities, including assessing the viability of the project. Financial arrangements take into account factors like the promoters' equity, liquidity ratio, debt-equity ratio, and more.
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Underwriting: Underwriting plays a pivotal role in launching a new issue. Underwriters act as intermediaries between issuers and investors. If the company is unable to sell the required number of shares or securities, underwriters commit to purchasing the unsold portion in the primary market. Financial institutions that take on the role of underwriters may receive underwriting commissions. Investors carefully assess underwriters to gauge the risk associated with investing in the issue. It's possible for underwriters to purchase the entire IPO issue and later sell it to investors.
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New Issue Distribution: Distribution is another critical function in the primary market. The distribution process begins with the issuance of a new prospectus, followed by announcements inviting the general public to subscribe to the issue. Detailed reports about the company, the issue, and information regarding the underwriters are made available for investors to evaluate and analyze the offering.
The primary market serves as the foundation for companies and institutions to access fresh capital for growth and development, while investors have the opportunity to participate in new securities offerings. Understanding the operations and significance of the primary market is vital for stakeholders in the financial world.
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