What is Primary Market?

When you think of the stock market, you perhaps conceive it as one big electronic market. While that is certainly true to some extent, the fact is that the stock market can be divided into two sections — the primary market and the secondary market. The secondary market is where you typically buy and sell shares via stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

But what is the primary market? Let’s find out.

Understanding the Primary Market

The primary market, also known as the new issue market, is that segment of the capital market where securities are issued to investors for the first time. For instance, when a company decides to launch an Initial Public Offering (IPO), its equity shares are first issued to successful subscribers in the primary market.

Similarly, when a company or a government entity issues corporate bonds or government bonds for the first time, it is done in the primary market.

The Different Participants in the Primary Market

Now that you know what the new issue market is, it’s important to get to know the different participants in this market segment. Check out these details below:

• The Issuing Entity

  These are the entities that issue the new securities in the primary market. They include companies and corporations, government entities and other organizations.

• The Underwriters

  Underwriters help companies prepare for their new issues. They also take on the responsibility of acquiring any unsold shares if the company is unable to sell the required number of shares to investors publicly.

• The Intermediaries

  Intermediaries include various entities like banks, brokers, dealers and other financial institutions who help facilitate the issue of new securities in the primary market.

• The Market Regulators

  Market regulators are bodies like the Securities and Exchange Board of India (SEBI) that oversee the functioning of the primary market. They ensure that the issue follows all the regulations in place.

• The Investors

  The investors are the institutions and the individuals who purchase the securities issued in the primary market.

The Functions of the Primary Market

The primary market in any country has several functions. Here is a closer look at why this market segment is an important part of India’s financial markets:

• Raising Capital and Funding

  The primary market gives companies a regulated space to raise capital for their business by issuing new stocks and/or bonds. The funds generated through such issues make it easier for issuing companies to meet the financial requirements of their business.

• Facilitation of Ownership Transfer

  Promoters in companies may want to liquidate their shareholdings in the entity. Initial Public Offerings in the primary market make this transfer of ownership from the promoters to the public possible.

• Price Discovery

  Underwriting in the primary market makes it easier to identify the initial price of a company’s security based on the forces of demand and supply in the market. This process of price discovery is crucial to any company that is launching a fresh issue of securities.

• Creation of Investment Opportunities

  Lastly, primary markets also provide investors with the opportunity to invest in newly issued stocks, bonds and other securities. These opportunities are not available in the secondary market, where only the stocks of previous listed companies are traded. For investors seeking to diversify their portfolio with the stocks of new companies, the primary market is highly beneficial.

Types of Issuances in the Primary Market

There are different types of issuances that the primary market supports, ranging from IPOs to rights and bonus issues. Take a closer look at the different types of security issues that occur in the primary market:

• Initial Public Offering (IPO)

  An IPO is the first issue of a company’s shares to its public. It allows the company to make the transition from a private company to a listed entity.

• Follow-on Public Offering (FPO)

  Any further issue of shares by a company to the public following the IPO is termed as an FPO. These issues also occur in the primary market.

• Rights Issue

  A rights issue is the issue of shares by a company to its existing shareholders. These issues are typically made at a discounted price, and shareholders have the option (but not the obligation) to exercise their rights to purchase the company’s shares at the reduced price.

• Bonus Issue

  A bonus issue is also an issue of shares by a company to its current shareholders. Here, the shares are offered free of charge as a reward to the company’s shareholders, or to increase liquidity among the company’s shares in the market.

• Preferential Allotment

  Preferential allotment involves issuing shares to a select group of investors at preferential or discounted rates. Companies resort to this kind of issue in the primary market to raise capital quickly and more affordably.

The Bottom Line

The primary market is an essential segment of the financial markets in the country. The SEBI and other regulatory bodies oversee the functioning of issues in the primary market strictly, so the interests of the issuing entities as well as the investors are protected. If you want to take advantage of listing gains, or if you want to become an early investor in a company, the primary market is where the opportunities lie.