What is Primary Market in Stock Market?

Securities are created for the first time in a Primary Market for investors to purchase. New securities are issued in this market via a stock exchange, allowing the government and businesses to raise capital.

There are three parties involved in a transaction in this market. It would consist of a corporation, investors, and an underwriter. An initial public offering (IPO) is a security issued by a company in a primary market, and the sale price of such a new issue is determined by a concerned underwriter, who may or may not be a financial institution.

An underwriter also facilitates and monitors the new issue offering. Investors purchase the newly issued securities in the primary market. Such a market is regulated by the Securities and Exchange Board of India (SEBI).

The entity which issues securities may be looking to expand its operations, fund other business targets or increase its physical presence among others. Primary market example of securities issued include notes, bills, government bonds or corporate bonds as well as stocks of companies.

Functions of Primary Market

The functions of such a market are manifold –

• New Issue Offer

A new issue offering is also facilitated and monitored by an underwriter. In the primary market, investors purchase newly issued securities. The Securities and Exchange Board of India (SEBI) regulates such a market.

The entity issuing securities may want to expand its operations, fund other business goals, or increase its physical presence, among other things. Securities issued in the primary market include notes, bills, government bonds, corporate bonds, and company stock.

• Underwriting Services

When launching a new issue, underwriting is critical. In a primary market, an underwriter’s role includes purchasing unsold shares if it is unable to sell the required number of shares to the public. Underwriting commissions can be earned by a financial institution acting as an underwriter.

Investors rely on underwriters to determine whether the risk is worth the potential rewards. It is possible that an underwriter will purchase the entire IPO issue and then sell it to investors.

• Distribution of New Issue

In the primary marketing sphere, a new issue is also distributed. A new prospectus issue kicks off this distribution. It invites the general public to purchase a new issue and provides detailed information on the company, issue, and underwriters involved.

Types of Primary Market Issuance

Following the issuance of securities, investors can purchase them in a variety of ways. There are 5 different types of primary market issues.

Public Issue:-

The most common method of issuing securities to the general public is through a public offering. It is mostly done through an Initial Public Offering (IPO), which results in companies raising capital from the capital market. These securities are available for trading on stock exchanges.

When a privately held company’s shares are first offered to the public through an IPO, it becomes a publicly traded company. A public offering allows a company to raise funds for business expansion, infrastructure improvements, and debt repayment, among other things.

Trading on an open market also increases a company’s liquidity and allows for the issuance of additional shares to raise additional capital for the business.

The Securities and Exchange Board of India is the regulatory body in charge of IPO oversight. According to its guidelines, a company’s authenticity is investigated, and the company is required to include all relevant information in the prospectus for a public offering.

Private Placement:-

Private placement refers to when a company offers its securities to a small group of investors. Bonds, stocks, and other securities may be used, and investors may be both individual and institutional.

Private placements are less difficult to issue than initial public offerings because the regulatory requirements are significantly lower. It also saves money and time, and the company can remain private.

This type of issuance is appropriate for start-ups or companies in their early stages. To raise capital, the company may sell this issuance to an investment bank or a hedge fund, or it may sell it to ultra-high net worth individuals (HNIs).

Preferential Issue:-

A preferential issue is one of the quickest ways for a company to raise capital. Companies, both public and private, can issue shares or convertible securities to a select group of investors. The preferential issue, on the other hand, is neither a public nor a rights issue.

Preference shareholders are entitled to receive the dividend before ordinary shareholders.

Qualified Institutional Placement:-

Another type of private placement is qualified institutional placement, in which a publicly traded company issues securities in the form of equity shares or partially or entirely convertible debentures, in addition to warrants convertible to equity shares and purchased by a Qualified Institutional Buyer (QIB).

QIBs are primarily such investors who have the necessary financial knowledge and expertise to make capital market investments.

Some QIBs are –

• Foreign Institutional Investors registered with the Securities and Exchange Board of India.
• Foreign Venture Capital Investors.
• Alternate Investment Funds.
• Mutual Funds.
• Public Financial Institutions.
• Insurers.
• Scheduled Commercial Banks.
• Pension Funds.

Qualified institutional placement is easier to issue than preferential allotment because it does not involve standard procedural requirements such as submitting pre-issue filings to SEBI. As a result, the process becomes much simpler and less time-consuming.

Rights and Bonus Issues:-

Another type of issuance in the primary market is the rights and bonus issue, in which the company offers existing investors the opportunity to purchase additional securities at a predetermined price (in the case of a rights issue) or to receive allotment of additional free shares (in the case of a bonus issue).

In the case of rights issues, investors have the option of purchasing stocks at a reduced price within a set time frame. The issuance of these types of shares increases the control of the company’s existing shareholders while incurring no costs.

A company may issue bonus shares as a gift to its existing shareholders. However, the issuance of bonus shares does not result in the infusion of new capital.

Examples of Primary Stock Market Selling

Company	Details
Facebook	One of the remarkable IPOs that were undertaken includes the Facebook initial public offering. The offer initiated in 2012 is to date the largest IPO in the technology sector. The company successfully raised $16 billion through its initial public offering. As an effect, its turnover increased by close to 100%.Also, there was a high demand for the stock in the primary market, which led to the pricing of Facebook’s stock to be fixed at $38 for each share as determined by the underwriters. The valuation of the stock eventually amounted to $104 billion, highest for a newly formed public company.
coal India	The biggest IPO undertaken in India was by Coal India in 2010, which raised Rs. 15,200 Crore. The shares were listed at Rs287.75 and eventually increased to Rs.340.The company offered a 5% discount on the final IPO price to retail investors, along with the subsidiaries and employees of the company.

Advantage and Disadvantage of Primary Market

Advantage:-

• Companies can raise capital at a low cost, and securities issued in the primary market have high liquidity because they can be sold in the secondary market almost immediately.
• The primary market is an important source of savings mobilization in an economy. Commoners’ funds are mobilized for investment in other channels. It results in monetary resources being invested in various investment options.
• When compared to the secondary market, the chances of price manipulation in the primary market are significantly lower. Manipulation typically occurs by deflating or inflating a security price, thereby interfering with the market’s fair and free operation.
• The primary market serves as a potential avenue for risk diversification. It enables an investor to diversify his or her investment across multiple financial instruments and industries.
• It is unaffected by market fluctuations. Stock prices are set before an initial public offering, and investors know how much money they will need to invest.

Disadvantage:-

• Because unlisted companies are not subject to the Securities and Exchange Board of India’s regulatory and disclosure requirements, investors may have limited access to information prior to investing in an IPO.
• Because the company is offering its shares to the public for the first time through an initial public offering, there is no historical trading data in a primary market for analyzing IPO shares.
• Small investors may find it unfavorable in some cases. Small investors may not receive share allocation if a share is oversubscribed.

Individuals can make well-informed decisions about investing in the primary market using this information about the market. It also paves the way for the development of a risk-diversified investment portfolio.

Primary Market vs Secondary Market

The primary distinctions between the Primary Market and the Secondary Market are as follows:-

Features	Primary Market	Secondary Market
Purpose	First-time issuance and sale of new securities	Securities that already exist are acquired and sold
Participants	Issuing Companies, Underwriters, Investors	Investors, Brokers, Dealers
Function	Capital Raising	Trading
Price	Fixed Price	Market-Driven Price
Volume	Low Volume	High Volume
Liquidity	Low Liquidity	High Liquidity
Regulation	Regulated by SEBI	Regulated by Stock Exchanges and SEBI

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