A market that issues new securities on an exchange is called primary market. Joint stock Companies, governments and other business groups collect finance through debt (borrowed fund) or equity (own fund) securities. Primary market is also known as “new issue market”.
The primary markets are those where investors can get first or initial issue. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business.
Once the initial sale is complete, further trading is said to conduct on the secondary market, which is where the bulk of exchange trading occurs each day. Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred. Any new issue of securities to investors takes place in a primary market. Most of the shares issued in primary market are through underwriters. Underwriters take the guarantee for the minimum issue of shares and for this guarantee they are paid underwriting commission.
Functions of primary market:
- Origination: It is investigation, analysis and processing of new proposals by specialist agencies.
- Underwriting: To ensure the success of new issue underwriting is done.
- Distribution: It is sale of securities to the ultimate investor. Primary market becomes successful only when shares are subscribed in large number.
Features of primary markets are:
- It is a part of capital markets.
- It deals with the issuance of new securities.
- All types of companies including joint stock Companies, governments or public sector institutions can obtain funds through the sale of a new shares or securities.
- The process of selling new issues to investors is called underwriting.
- It is also called an initial public offering (IPO).
- It is used through prospectus.
- This is the market for new long term capital.
- The securities are issued by the company directly to investors.
- Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
- The primary market performs the crucial function of facilitating capital formation in the economy.
- The new issue market does not include loans from financial institutions.
- It may include converting private capital into public capital which is called “going public.”
- In the primary market prices of securities are often set beforehand