When new investors hear the word “Primary Market”, they are confused. How is the primary market different from the stock market? Why is it called the “primary market”? And so on. In this article, you will learn what the primary market is, and the difference between the primary market and the stock market.
What Is The Primary Market?
The primary market is the place where new financial instruments are created.
The primary market is just a hypothetical place and reflects the nature of the securities sold there. It is where companies acquire finances, through debt-based securities (bonds), or equity-based securities (shares).
Then, a group of investment banks called an underwriting group, set a price range for the security. Then they become responsible for the sale of the security to investors.
After the initial sale of the security is finished, further trading is done on the secondary market, where investors can purchase securities from other investors.
What Happens In The Primary Market?
In the primary market, the investor purchases the securities directly from the company. The primary market works as an expo. The companies, or government, newly issue shares to attract investors and raise capital.
For a company to establish a primary market, to sell their bonds or shares, they need the approval of the SEBI.
This process can take a lot of time, as the company needs to submit an extensive list of documents, which need to be reviewed.
In India, there is another way that is much faster. A Qualified Institutional Purchase (QIP) is when a company is allowed to raise capital from the market, without submitting any filings to the government.
Because of this “shortcut”, the company is only allowed to raise capital from institutional investors or accredited Indian investors
Types Of Listings
The most common types of primary market listings are
- Initial Public Offering (IPO): This is when a new company lists its shares to the public for the first time. The price of the shares is determined by an investment bank.
- Rights Issue: A rights issue is when a company is already in the secondary market. Current investors are offered prorated rights based on the number of shares that they own, and new shares are available for sale to the public.
- Preferential Allotment: Offers shares to specific investors, at prices not available to the general public. The specific investors are usually banks, hedge funds managers and mutual fund managers, as they buy these shares in large quantities.
- Private Placement: Private placement is similar to the preferential allotment. Here, they issue shares in large quantities to specific investors without making shares publicly available.
Primary markets are hypothetical places where companies list their shares or bonds for the first time.
There is a primary market for most assets. T
hey are usually at discounted rates and are a good opportunity to invest. Keep a lookout for IPOs, as good shares may be much cheaper than in the secondary market.
