In the Primary or the New Issue Market, new issues of securities are raised, which are issued to the public for the first time. It is used by new and present companies. The company issues new shares and debentures for gathering lengthy-time period funds. The issue of securities is made thru the prospectus.
The purchaser of new shares and debentures can also be businessmen, clients of the company, personnel of the company, current shareholders, etc.
- Less Price manipulation while in comparison to the secondary market.
- There is no brokerage payment, transaction fees, etc
- Market fluctuations do not affect it
- It helps in the diversification of the portfolio
- It helps in raising capital for the companies
- Investors get the share at the same prices
- It helps in cost Reduction
- Corporations – They require funds to grow and run their operations
- Institutions referred to as “Buy Side” Fund Managers
- Investment Banks are referred to as the “Sell Side”
- Public Accounting Firms
FUNCTIONING OF PRIMARY MARKETS
It enables capital formation through channelizing money from personal savers into perfect productive investments. It consists of a company, an investor, and an underwriter.
The company issues IPO: The securities for the first time are issued in the primary market. This system is acknowledged as an Initial Public Offering IPO. Since the securities are bought for the first time, the primary market is recognized as the New Issue Market.
Role of the underwriter: It is a whole method of raising capital by way of promoting new stock to investors through an IPO. The underwriter then decides the sale price of the new issue of securities. The underwriter enables and monitors the new issue offering. Financial establishments such as funding banks, insurance plan companies, and so on provide underwriting services.
Investors: They are the purchasers of the new securities in the primary market
PREREQUISITES FOR INVESTORS:
- PAN Number
- Bank Account
- Demat Account
TYPES OF ISSUES
Public Offering: A public offering happens when a listed company makes an offer document. The document may be of the fresh issue of securities or an offer for sale to the public.
Rights Issue: The right Issue is when a listed company issue fresh securities to the existing shareholder. It is best suitable for companies that would like to raise capital to fund their operations or looking for better growth opportunities.
Private Placement / Preferential Issue: Private placement is basically an issue of shares or convertible securities by listed companies which is neither a right issue nor a public issue. It is an effective way for the company to raise equity capital.
ROLE AND FEATURES OF PRIMARY MARKET:
1) The Organization of New Issues:
There are two types of investigation that are carried out:
The preliminary investigation includes designated learning about economical, financial, legal, and technical factors to make certain the soundness of the project.
The structure of financial arrangements involves requirements and availability of promoter’s equity, equity from the public, different ratios, and overseas exchange requirements.
The service provider bankers can be banks, financial institutions, private funding firms, etc.
An essential component of the company of new shares is the information about adequacy and structure of financial arrangements.
The second feature is carried out via sponsoring institutions. They supply advisory services.The advisory carrier includes Types of issue, Thug, Pricing, Methods of issue, etc.
2) Underwriting of New Issues:
The underwriting means guaranteed buy of a targeted quantity of new issues at a fixed price. The buy may additionally be for sale to the public, for solely one’s portfolio or for each purpose. Minimum subscription is assured by using underwriters. If the issue is absolutely subscribed, no legal responsibility would be left for the underwriters.
If the underwriter fails to promote the assured quantity of shares to the public, it will have to buy the unsold shares via itself. They can be banks or economic establishments or specialized underwriting firms.
3) Distribution of New Issue:
Distribution of new issues means the sale of the stock to the public. The distribution job is finally hand over to brokers and dealers. The brokers or dealers hold direct contact with the supreme investors.
- During over subscription, small investors don’t get an allocation.
- Money gets locked in for a long time.
- Quite expensive
- Disclosure of information
- Decision’s take time