Primary Market

• Definition:
  • The primary market is the market for new issues or new financial claims.
  • It's where securities are issued to the public for the first time.
  • In essence, it's the platform where borrowers exchange new financial securities for long-term funds.
• Methods of Raising Capital in the Primary Market:
  • 1. Public Issue:
    • Securities are offered to the general public through a public offering.
    • This involves advertising the issue, inviting applications from the public, and allocating securities based on the applications received.
  • 2. Rights Issue:
    • Existing shareholders are given the right to subscribe to new shares in proportion to their existing holdings.
    • This gives existing shareholders the opportunity to maintain their proportionate ownership in the company.
  • 3. Private Placement:
    • Securities are sold privately to a select group of investors, such as institutional investors (insurance companies, pension funds) or high-net-worth individuals.
    • This method is typically faster and less expensive than a public issue.
• Key Functions of the New Issue Market:
  • 1. Origination:
    • Involves the investigation, analysis, and processing of new project proposals.
    • Merchant bankers typically perform this function.
  • 2. Underwriting:
    • Underwriters agree to purchase a specified number of securities from the issuing company if the public does not subscribe to the entire issue.
    • This protects the issuing company from the risk of under-subscription.
  • 3. Distribution:
    • Involves the sale of securities to the ultimate investors.
    • This function is performed by brokers, agents, and other intermediaries who maintain contact with investors.

The primary market plays a crucial role in the economy by enabling companies to raise capital for growth, expansion, and other business activities.