Capital Market can be broadly divided in Primary Market and Secondary Market.
What is a Primary Market?
- The Primary Market is the part of Capital Market that deals with the issuance of new securities and then sold to investor directly by the issuer. It is also known as a New Issue Market.
- In this Market, Investors buy securities that were never traded before.
- New Issue Markets are facilitated by underwriting groups, consisting of investment banks that set a beginning price range for a given security and oversee its sale to investors. Once the initial sale is complete, further trading is conducted on the secondary market.
- Investors typically pay less for securities on the primary market than secondary market.
What is the role of the ‘Primary Market’?
- It issues new securities on an exchange for companies, Government and other groups to obtain financing through debt-based or equity-based securities.
- It provides the channel for sale of new securities.
- It
create long term instruments through which corporate entities raise funds from the capital market. - It provides the issuers the opportunity to raise resources to meet their requirements of investment and/or discharge of some obligation.
- They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc.
- They may issue the securities in
domestic market and/or international market.
Ways of raising funds through Primary markets
Corporate entities raise funds from New Issue Market in three ways.
Public Issue: A stock exchange lists the securities and corporate raises funds through Initial Public Offering (IPO).
Rights Issue: Existing shareholders are offered more shares at a discounted price and or a pro-rata basis.
Private Allotment: A corporate issues shares at a price which may or may not be related to the current market price of the same security.
Major Players of Primary Market
There are several major players in the New Issue market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors.