WHAT IS THE PRIMARY MARKET AND ITS FUNCTIONS?
What Is the Primary Market (PM)?
When you are a beginner in the stocks market, one of the common terms you might come across is: ‘Primary Market’. Well, let’s have a look at what it is and what it’s functions are.
It is a part of the capital market in which entities like companies, governments and other institutions obtain funds through the sale of debt and equity-based securities.
With raising an Initial Public Offering (IPO), when a company decides to go public for the first time, it is done in the primary market. It is also called the New Issue Market (NIM) as the securities are sold for the first time in the primary market.
During an IPO, the company sells its shares directly to the investors in the primary market. Underwriting is the process of raising investment capital by selling new stock to investors through an IPO.
Once the shares are sold, they are bought and sold by traders in the secondary market.
Functions of PM
New issue offer
Securities are sold for the first time in this market which had not been traded on any other exchange earlier. Hence, it is also called a New Issue Market. Organising new issue offers involves a detailed assessment of project viability, among other factors. The financial arrangements for the purpose include considerations of promoters’ equity, liquidity ratio, debt-equity ratio and requirement of foreign exchange.
Underwriting is an essential aspect while offering a new issue. Purchasing unsold shares if it cannot manage to sell the required number of shares to the public is the main role of an underwriter in a primary marketplace. A financial institution may act as an underwriter, earning a commission on underwriting.
Distribution of new issue
A new issue is also distributed in a primary market. Such distribution is initiated with a new prospectus issue. It invites the public at large to buy a new issue and provides detailed information on the company, issue, and involved underwriters.