What is Primary Market?
Primary market is the part of capital market where issue of new securities takes place. Public sector institutions, companies and governments obtain funds for further growth of the company after the sale of their securities or bonds in primary market. The selling process of new issues in primary market is called as Underwriting and this process is done by a group of people called underwriters or security dealers. From a retail investor’s point of view, investing in the primary market is the first step towards trading in stocks and shares.
Role of Primary Market
Capital formation - It provides attractive issue to the potential investors and with this company can raise capital at lower costs.
Liquidity - As the securities issued in primary market can be immediately sold in secondary market the rate of liquidity is higher.
Diversification - Many financial intermediaries invest in primary market; therefore there is less risk if there is failure in investment as the company does not depend on a single investor. The diversification of investment reduces the overall risk.
Reduction in cost - Prospectus containing all details about the securities are given to the investors hence reducing the cost is searching and assessing the individual securities.
Features of Primary Market
- It is the new issue market for the new long term capital.
- Here the securities are issued by company directly to the investors and not through any intermediaries.
- On receiving the money from the new issues, the company will issue the security certificates to the investors.
- The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures.
- External finance for longer term such as loans from financial institutions is not included in primary market. There is an option called ‘going public’ in which the borrowers in new issue market raise capital for converting private capital into public capital.
Prerequisites for Investor to Participate in Primary market Activities:
- PAN Number
- Bank Account
- Demat Account
Types of issues
Public issues can be classified into 3 types:
Initial Public Offering (IPO) – Fresh issue of shares or selling existing securities by an unlisted company for the first time is known as IPO. Listing and trading of securities of a company takes place in IPO.
Rights Issue – Rights issue is when the listed company issues new securities and provides special rights to its existing shareholders for buying the securities before issuing it to public. The rights are issued on particular ratio based on the number of securities currently held by the share holder.
Preferential Issue – It is the fresh issue of securities and shares by listed company. It is called as preferential as the shareholders with preferential shares get the preference when it comes to dividend disbursement.
Benefits
- Price manipulation is very less in primary market compared to secondary market.
- There is no payment of brokerage, transaction fees, and stamp duty or service tax.
- Investors get the shares at same prices so market fluctuations do not affect it.
Disadvantages
- The shares are allotted proportionately if there is over subscription which means, the small investors may not get any allotment.
- Money is locked in for longer time, as it is a long term investment.
- The shares allotment for the investor takes few days in primary market compared to secondary market where it takes only 3 days to allot the shares.
Contributed By: B C Shetty & Co |
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Established in 1985 by Mr.Chandra Shekar Shetty, operating from 3 branches, B.C.Shetty & Co. is a firm dedicated to serving their clients with utmost transperancy by offering qualitative professional service. | |
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