Definition: Primary Market is a form of the capital market wherein new securities are sold by the companies for the very first time to the investors, to raise funds and that is why it is also acknowledged as New Issues Market (NIM).
The process of selling the new securities, in the primary market is called underwriting, which is performed by a group called as underwriters or security dealers.
The underwriting service is offered by financial institutions such as investment banks, insurance companies, etc. The underwriting companies guarantee payment if there is any loss and accepts the risk which occurs as a consequence of such guarantee.
The main function of the primary market is to mobilize the investible money from the savers to the companies or young entrepreneurs who seek funds to set up new businesses or expand the existing venture, by issuing securities.
Types of Issue of Securities in Primary Market
- Public Issue: Public issue is when a company enters the market, to raise money from all kinds of investors. The securities offered for sale to the new investors, so as to become a shareholder in the issuer company, is called Public Issue.
- Initial Public Offer: Initial Public Offer or IPO, as the name suggests, is the fresh issue of equity shares or convertible securities, or exiting shares or convertible securities by an unlisted company for the very first time i.e. the shares are not previously traded or offered for sale to the general public. This is often followed by listing and trading of the company’s securities on the stock exchange.
- Further Public Offer: Otherwise called as Follow on offer or FPO, refers to the fresh issue of securities to the general public made by a company already listed on the stock exchange, so as to raise additional funds.
- Right Issue: Right Issue is an offer to the company’s existing shareholders to buy further new shares of the company at a discount, as a part of the dividend of pre-emption rights. It helps the firms to raise additional funds, without going to the public. It invites its existing shareholders to subscribe for its fresh issue in the proportion of their shareholdings on the record date in the concern.
- Bonus Issue: When a company issues fully paid additional shares to the company’s existing shareholders for free. The issue is made from the company’s free reserves or securities premium account, in a specific proportion to the shareholding on a specific record date.
- Private Placement: When a company’s stocks or bonds are sold directly to a selected group of people, say 50 to 200 people, called as private investors or institutions, instead of offering the same to the general public is called private placement. Hence, in case of a private placement there are only a handful of subscribers to the company’s shares. However, it is capable of raising money, more quickly as compared to offering shares for sale in the open market.
- Preferential Allotment: Preferential Issue is one in which the specified securities are allotted by a listed company to a selected group on a preferential basis. The issuing company needs to adhere to the provisions relating to pricing, lock-in period, disclosures, and so on.
- Qualified Institutional Placement: When a company, which is already listed in a stock exchange issues shares or debentures (fully or partly convertible) or any other kind of security not including warrants, which are convertible in nature, to Qualified Institutional Buyer (QIB), is called as Qualified Institutional Placement (QIP).
- Institutional Placement Programme: Institution Placement Programme or IPP implies a further public issue of equity shares by a listed firm or group of promoters of a listed company, wherein the offer and allocation are made to Qualified Institutional Buyers only.
Note: Qualified Institutional Buyers includes mutual fund, venture capital fund, scheduled commercial bank, state industrial development corporation, national investment fund, insurance fund, provident fund, pension fund, etc.
In a nutshell, Primary Market is a market where new long term securities are created and issued to the public for sale through IPO, that helps the company, public sector institutions and governments to raise funds. These funds are injected by the company in new projects and also to expand or upgrade the existing projects.