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They sell their securities to the public through an Initial Public Offering (IPO). The securities can be directly bought from the shareholders, which is not the case for the secondary market. The primary market is a market for new capital that will be traded over a longer period. Here the securities are issued on an exchange basis.
A primary market is not inclusive of sources, from where companies can generate external finance over a long term, such as loans provided by financial organizations. Through these markets, companies can also go public, which means changing private capital to public capital.
Many companies have entered the primary market to earn profit by converting their capital, which is basically a private capital, into a public one, releasing securities to the public. This phenomena is known as "public issue" or "going public".
Primary Market Underwriters:
Investment banks are the main underwriters in the primary markets and thus are the major facilitators of these types of markets. They normally decide the base price of the securities on sale and then administer the entire process of its sale to the investors.
The underwriters also play the important role of safeguarding the issue related risks for the companies that are offering the shares for sale.
Primary Market Processes:
Primary markets are basically the platform where an investor gets the first opportunity to purchase a new security. The group or company that issues the security gets the money by selling a certain amount of securities.
Normally, the entire process of buying a primary market security involves several rules and regulations that have to be properly adhered to before a security can change hands.
IPO or Initial Public Offering is one of the integral procedures of the primary markets. Through an IPO an organization announces the sale of its securities at a certain starting price.
Investors can obtain news of upcoming shares only in the primary market. The issuing firm collects money, which is then used to finance its operations or expand business, by selling its shares. Before selling a security on the primary market, the firm must fulfill all the requirements regarding the exchange.
After trading in the primary market, the security will then enter the secondary market, where numerous trades happen every day. The primary market accelerates the process of capital formation in a country's economy.
Experts have said that various operations in a primary market such as advices given to issuers and underwriting are similar to mergers and acquisitions. They also opine that a primary market is an important source of revenue generation for investment banks.
Methods of Issuing Securities in the Primary Market:
There are three methods through which securities can be issued in the primary market:
- Rights Issue,
- Initial Public Offer (IPO), and
- Preferential issue.
A company's new offering is placed on the primary market through an initial public offer.
Primary Market Volatility:
Unpredictability is one of the major features of a primary market. They are normally more unstable compared to the secondary markets, which see majority of the trades in an exchange. The major reason behind this is the fact that it is difficult to precisely assess the levels of demand among investors for a security before a couple of days of trading.
Primary Market Vs. Secondary Market:
The basic difference between secondary and primary markets is that in case of the latter, an investor buys the securities directly from the organization that is providing them.
Primary Markets Sales:
There are several ways in which sales operations are conducted at the primary markets. Companies can provide their shares at face value or they can also be sold at discounted prices. Securities can be sold in both international and domestic markets. When a transaction is completed in a primary market, the issuing organization provides the investors new security certificates.
Primary Market Dealers:
The dealers who operate at the primary markets receive commissions that are included in the prices at which the securities are offered.
Importance of Primary Markets:
Apart from their importance for the businesses, primary markets are also critical from a national perspective as they help to create capital.