The primary market is the part of the capital market that deals with the issuance and sale of equity-backed securities to investors directly by the issuer. Investors buy securities that were never traded before. Primary markets create long term instruments through which corporate entities raise funds from the capital market. It is also known as the New Issue Market (NIM).
In a primary market, companies, governments or public sector institutions can raise funds through bond issues and corporations can raise capital through the sale of new stock through an initial public offering (IPO). This is often done through an investment bank or finance syndicate of securities dealers. The process of selling new shares to investors is called underwriting. Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.
IPOs are not the only way new shares are issued. Publicly traded companies can issue new shares in what is called a primary issue of debt or stock, which involves the issue by a corporation of its own debt or new stock directly to institutional investors like pension funds, or to private investors and shareholders.
Since the securities are issued directly by the company to its investors, the company receives the money and issues new security certificates to the investors. The primary market play the crucial function of facilitating the capital formation within the economy. The securities issued at the primary market can be issued in face value, premium value, and at par value.
Once issued, the securities typically trade on a secondary market such as a stock exchange, bond market or derivatives exchange.
Corporate entities raise funds from the primary market in three ways:
- Public Issue – a stock exchange lists the securities and the corporation raises funds through initial public offering (IPO).
- Rights Issue – existing shareholders are offered more shares at a discounted price and on a pro-rata basis.
- Preferential Allotment – a corporate issues shares at a price which may or may not be related to the current market price of the same security.