A capital market is a planned market, which is further classified into primary and secondary markets, each serving its specific purposes.
The primary market is said to enable new stock issues, bonds, and securities to be sold to the public for the first time through IPO (Initial Public Offering), preferred allotment or right issue.
The initial compliance process comprises filing statements with the SEC (Securities Exchange Commission).
Then one must wait until approval is granted to issue them in the primary market for sale.
Companies and government entities sell the shares and stocks to fund business expansion and advancements following the IPO.
Leveraging investors as they have to pay less for the purchase than the secondary market.
The Securities and Exchange Board of India (SEBI) regulates such a market in India.
A primary market is an introductory market which facilitates fundraising for entities like corporations and governments.
In a primary market, securities are initially introduced to investors by issuing companies. Upon the initial sale, further trading is conducted and carried forward to the secondary market, where other augmented exchanges and trading occur each day.
The parties to this primary market are the issuing entity/company, investors and underwriters.
Issuing entity:
The issuing entity/company is the party that wants to raise funds by issuing offerings and securities in the market.
Investor:
The investors are the party interested in buying the securities in the market.
Underwriters:
An underwriter is mainly a broker who helps the issuing company sell its securities to the investing public.
A few of the properties of the primary market are mentioned below:
New issue offer is one of the vital functions of the primary market. This market holds the authority to offer a new issue that has not been traded before. This is one of the reasons that makes the primary market a new issuer market.
Issuing an offer is not a simple task. A lot of process goes into it. A detailed assessment of the viability of a project is involved, and amongst the financial part of the arrangement, the involvement of taking the promoter’s debt-equity ratio, liquidity ratio, and equity ratio, among others, are also considered.
Underwriting is a vital aspect or a part of offering a new issue. Unsold shares sold in the marketplace are one of the primary functions of underwriting services. Financial institutions earn commission by often playing the role of an underwriter.
Frequently financial backers rely upon guarantors to measure whether undertaking the risk would merit the profits. It might likewise happen that the guarantor purchases the whole IPO issue, accordingly offering it to financial backers or investors.
This is one more vital capacity of the primary market. The dispersion cycle or the distribution process is started with another plan and a new perspective issue.
People, in general, are welcome to buy the new issue. Factual data or information is given on the company’s organisation and the issue terms alongside the underwriters.
Many pioneer companies went for Initial public offerings in the past.
The most well-known international example happens to be Facebook. Facebook, a technology giant, decided to go for an Initial public offering (IPO) in 2012. The company raised 16 billion USD with its IPO.
Now, let us look at a domestic example.
Coal India went for an initial public offering (IPO) in 2010, and it raised over INR 15,000 crores. To the investors, there was a discount of 5 per cent on the final price of the IPO.
We all know that LIC, the behemoth, is set to launch its IPO in the upcoming season.
The IPO initiated by the government of India is all set to become the biggest IPO in the history of Indian primary markets.
There are different ways of purchasing security from the primary market. After the issuing entity issues the securities, investors can buy them in five different ways, depending on the method executed by the issuing company.
So, the five different ways to purchase securities from the primary market are as follows:
Public issue is the most common methodology of allowing the public to purchase security. The initial public offering (IPO) policy is used to issue shares to a large crowd.
Once the IPO is announced, companies allow the public to help them raise capital for their business. After this, the stocks are listed on the stock exchange for trading purposes.
When a private limited company decides to go public, they do it with the help of an IPO. The capital raised by the company through IPO is used to strengthen the company’s liquidity, better the firm’s infrastructure, and repay debts.
If a private company wants to go for an initial public offering, it must face multiple enquiries from SEBI (The Securities and Exchange Board of India). To ensure authenticity, India’s Securities and Exchange Board closely follows the IPO and the firm before going for an IPO.
When a company decides to issue securities only to a limited number of investors, it is known as Private Placement. The small group of investors can have institutions as well as individuals. The securities issued to private placement can be stocks, bonds or any other type of security.
Unlike Initial public offerings (IPO), private placement has fewer follow-ups from The Securities and Exchange Board of India. The regulations for private placement are more liberal than those of IPO.
A private placement is an appropriate method of issuing shares for typically new companies, and it helps reduce the cost and time involved in issuing shares. Hence, companies in their formative years should opt for private placement.
Preferential issues are like issuing preference shares. The companies can give securities to a group of investors, irrespective of their listing in the stock market. It includes paying dividends to preference shareholders before ordinary shareholders.
However, one should not confuse the preferential issue with public or right issues. This is one of the fastest methods to raise capital for a company.
Qualified institutional placement involves selling securities to Qualified Institutional Buyers (QIB). Listed companies use this placement as a fundraising tool to raise capital from Qualified Institutional Buyers (QIBs).
Qualified institutional placement is a private placement introduced by The Securities and Exchange Board of India and facilitates the companies raising capital by issuing securities to QIBs.
Qualified Institutional buyers are expert investors with ample financial knowledge to make intelligent investments in the capital market.
Some highly recognised QIBs are:
This Qualified Institutional placement methodology is easier than preferential placement as they do not require any heavy procedure following like submission of pre-issue filings to SEBI. It reduces the cost and time of issuing securities by a significant amount.
Right, and bonus issues are when the company decides to issue securities to the already existing investors. This policy is formed to give additional benefits to a company’s investors.
The investors are allowed to buy securities at a predetermined rate, and they can get extra shares allotted during the bonus issue.
The right issues facilitate investors to buy stocks at a discounted price for a specific time.
The shares are given to the existing shareholders during bonus issues as a bonus for being loyal.
After accumulating enough information on primary market functions, features and definitions.
Let us dive into the advantages of the primary market:
Organisations can obtain financing for their businesses in a cost-effective and seamless manner. Additionally, securities are often presented in the primary market, which can nearly be immediately sold in the optional secondary market, subsequently giving high liquidity.
When contrasted with the auxiliary secondary market, there are fewer possibilities for cost control in the essential primary market. This prompts better straightforwardness and activities in the working of the market.
The essential primary market fills in as an expected road for expansion for financial backers or investors, subsequently cutting down the quantum of a chance of risk. Financial backers can allot their speculations across resource classes in numerous monetary instruments.
In an economy, the primary market is crucial in mobilising the savings, and the currency flows from the general public to variegated investment channels. Hence, the monetary wealth of the country is efficiently used for investment purposes.
The primary market does not experience any market fluctuations. The prices are pre-determined, and investors know the price before investing in a particular security.
When we look at the upside of the primary market, we should also know about this market’s downside aspect, which should be looked into before investing.
Hence, the disadvantages of the primary market are:
The amount of information available to the suitors before they invest in the IPOs is more petite, giving rise to unwanted speculations and hurdles in the entire financing process.
This is because unlisted companies are outside the purview of SEBI’s regulations and the chances of risk are high and probable investors might not just add up to the entire scenario
Since the shares are issued for the first time, there’s no historical data available that analyses the IPO shares, making investing a little speculative for the investors. Also, if a share is oversubscribed, small investors may not be able to receive their allocation for the time being.
Small investors tend to invest small amounts into the primary market. If many investors want an offering, the issuing company might not be able to allot shares to a small investor.
Hence, the primary market is unfavourable for small investors.
A key difference in the primary market is that a primary market is only concerned with the transactions where the issuing company issues a public offering to the investors for the first time. Further selling of those same shares takes place in the secondary market.
To get a detailed understanding of how the primary market differs from the secondary market.
Let us provide a detailed comparison chart comparing the primary and secondary markets.
S.no. | Basis | Primary Market | Secondary Market |
1 | Definition | The primary market is where the securities are traded directly from the issuing company to the investors, and it is the place where securities are sold to first-time investors. | The secondary market is where the securities are traded among the investors. A share comes to the secondary market after being issued in the primary market. |
2 | Synonymous names | The primary market is also known as the new issues market. | The secondary market is also known as the aftermarket. |
3 | Parties involved in the trade. | The buying and selling of securities happen between the investors and issuing companies. | The buying and selling of securities happen among the investors only. |
4 | Fund providing | The primary market allows a company to raise capital for its business ventures, and it aids in finance for a company’s expansion and growth. | The secondary market does not allow companies to raise funds for their ventures. |
5 | Intermediary | Underwriters are the intermediates in a primary market. | Brokers are the intermediates in a secondary market. |
6 | Fluctuation in price. | The primary market has fixed prices. Hence, there are no fluctuations in the primary market. | The secondary market prices depend on demand and supply, and hence, there are tremendous fluctuations in the costs of the secondary market. |
7 | Variety of instruments | The primary market does not entertain variety in its securities. The market has limited options: initial public offerings (IPO) and follow-on public offerings (FPO). | The secondary market has a plethora of options. There are various products for an investor in the secondary market.
Some of these products are shares, debentures, derivatives and warrants. However, that is not all. The secondary market is a potpourri of financial instruments. |
8 | Purchase. | In a primary market, the investors purchase securities directly from the issuing company. | The investors do not get involved with the issuing company in the secondary market while purchasing securities. |
9 | Transactional frequency | In a primary market, the investor can invest only once in a market for a particular security, and the sale and purchase are limited to the primary market. | The secondary market has no limit to selling and purchasing security, and investors can do it as many times as they want. |
10 | Beneficiary | The company is the beneficiary in a primary market. | The investor is the beneficiary in the secondary market. |
11 | Structure | The primary market does not have a structure, so it is not organised. | The secondary market has a well-formed structure and an organised set-up. |
12 | Regulations | If a company decides to issue shares in the primary market, it needs to follow all the guidelines provided by India’s Security and Exchange Board. | The secondary market has guidelines provided for the investors. Investors need to follow the guidelines given by the stock exchange and the government. |
13 | Interference | A primary market experiences government interference during the issue of shares by a company. | A secondary market does not experience any government interference. |
14 | Advantage | A Primary market is beneficial for fundraising for a corporation or government. | A secondary market is beneficial for booking profits for an investor. |
15 | Disadvantages | A substantial disadvantage of the primary market is its time-consuming and expensive methodology. | A substantial disadvantage of the secondary market is the losses incurred by the investors due to fluctuating prices. |
Security offerings in the primary market are subjective to investors.
Most of the issue offerings in a primary market are not available to an individual investor.
This selectiveness in offerings does not allow individual investors to understand or experience a primary market offering.
Only certain shareholders and institutions are privileged enough to experience all kinds of primary market issuance.
For example, only institutional investors and underwriting investment bank clients can avail securities during IPO transactions. Similarly, only accredited investors are allowed to avail the private placements.
Hence, individual investors buy individual stocks or invest in mutual funds through retirement or brokerage accounts. Secondary market sales purchase mutual funds, individual stocks, and exchange-traded funds through retirement or brokerage accounts. Secondary market selling is prevalent among individual investors.
In the share market, the primary market possesses unique risk. The SEC says that an IPO is a speculative investment. Speculative investments are high-risk investments, and primary market offerings do not have the desired liquidity.
Further, primary market investors cannot simply sell their securities in the secondary market like one can do with public shares. Hence, being a primary market investor might look promising, but it comes with its allocation of risk.
Bottom line
Understanding the fundamentals of the primary market can help an individual make well-informed investment decisions. Investing in the primary market helps diversify the portfolio because Initial public offerings (IPOs) can offer substantial returns.
Are you still wondering why there is so much euphoria around IPO announcements?
The primary market is a financial market where companies launch their securities.
If a private company wants to go public or a listed company intends to issue new shares or bonds, the primary market is its launchpad.
The role of the primary market is to facilitate the fundraising of companies and governments by attracting investors. These funds might be used to clear debts or expand the business.
The primary market also allows investors to put their money into assets or be loyal shareholders of a promising start-up.
All of these facilities help an investor generate the desired income.
The primary market is transactional with no physical set-up, and it is not your weekly thrift market.
It is a combination of various transactions that involve purchasing security by the investors, which is sold directly by the issuing company. The primary objective behind the primary market is to raise capital for the issuing entity—corporations or government.
Investment banks usually underwrite the securities sale in a primary market, making the investment banks an intermediary of the primary market. The objective of an underwriter is to ease the selling of securities by finding appropriate investors for them.
Suppose a company wants to make transactions through public offerings. In that case, it needs to file a registration statement with the Securities and Exchange Board of India (SEBI) and share sensitive information about the company before issuing public shares in the primary market.
A company must conform to the SEBI guidelines before making transactions in the primary market via public offerings.
This is how the primary market works.
There is not much difference between the functioning of primary market and secondary market in India.
The primary market allows an investor to purchase securities like shares or bonds directly from the issuing company in a one-go transaction.
The secondary market allows an investor to purchase or sell stocks and bonds to another investor. One can carry out purchase and sale transactions infinite times in the secondary market.
When an Indian company wants to go public and make a primary for its shares in the stock exchange, it needs to get the approval of the Securities and Exchange Board of India. The Securities and Exchange Board of India is the regulator for the Indian stock exchange like SEC is for the usage stock exchange.
The stock exchange that forms the secondary market of India is the Bombay Stock Exchange (BSE) Limited and the National Stock Exchange (NSE). These stock exchanges are the highly traded stock exchanges in the Indian Subcontinent
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Open Demat Account &
Trade @ Rs15 per order.
“Filing of complaints on SCORES – Easy & quick”
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.