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Primary Market - An Overview

    IndianMoney.com Research Team | Thursday, October 15,2009, 07:04 PM
 

We have written many articles on capital market to educate our visitors. Capital market includes both Primary market and secondary market. Even though primary and secondary markets are dealing with securities there is a huge difference in the structure and fundamentals of these two. Primary market is used by companies to raise capital by issuing IPOs but secondary market is for the further trading of the shares. In this article we are giving you a brief about Primary market.

A company needs capital if it wants to expand its business or diversify its business or in order to modernize its whole structure no matter if it is a public company or public sector undertaking. To get the capital that is required by the company it usually goes for the issue of shares and the process of issuing of shares is done in the primary market.

To define the primary market in the simplest terms it is a market where the securities are sold in order to raise the funds or the capital required by the company. The securities can be in many forms such as equity shares, preference shares, debt instruments, bonds etc.

Capital market is a market where the firm or the companies can raise long term funds. The capital market consists of banks, insurance companies, stock exchanges which play a role in channelizing the long term funds for the commercial purpose. The capital market has two segments the first one is the primary market and the second one is the secondary market.

Characteristics of Primary Market

  • The first characteristic is that the securities are being sold for the first time
  • These securities can be sold to individual investors or group of investors or to another company
  • This is a place where the company gets the long term capital

IPO & FPO

The company could be issuing the share for the first or may be second or third time. If the issue of the share is being done for the first time by a company then it is called as IPO (Initial Public Offering) and if the company is issuing shares for the second or the third time then it is called as FPO (Follow-on Public Offering). Some of the companies which went for IPO in the year 2009 are Club Mahindra Holidays, Adani Power, NHPC, Indiabulls Power, etc. and some of the companies which had done the FPO’s are ICICI, ONGC etc.

Ways to raise Capital in the Primary Market

There are 4 ways in which a company can raise the capital in the primary market

  • Public Issues
  • Offer of Sale
  • Rights Issue
  • Private Placement

Public Issues


In Public Issues the company offers the shares directly to the public/institutions. The shares are allotted at a stated price. It is done through document called a “prospectus”. It is one of the most common methods followed all over the world.

Offer of Sale


In this type the company sells off all its securities to one issue houses or the share brokers. The share brokers sell these securities at higher price than the price at which they have purchased them from the company. The difference in the purchasing and selling price is called as “turn or spread or Bought Out Deals (BOD)”. The advantage of this kind of sale is that the company need not print and advertise the prospectus.

Rights Issue


This is an FPO. In this type the company distributes the new shares or securities amongst the existing share holders. The distribution depends on the capital that has to be raised by the company and the number of the shares that the existing investors possess.

Private Placement


In this type the share brokers or issue houses purchase all the shares out-rightly from the company and issue them to their own clients at the same price or at the premium price.

Advantages and Disadvantages of Primary Market

There are certain advantages of primary market and as every coin undoubtedly has two sides there are certain disadvantages also. Let’s have a look at some of these

Advantages

  • It provides a platform for a company to modernize or diversify its business.
  • The companies can get the capital easily for a long term.
  • The investors get a good opportunity to invest in the business and get good returns in the form of interest, dividends.
  • Even small investors can participate and buy the securities from the market.

Disadvantages

  • There are possibilities that the company is just making exaggerated claims about the prospective projects so as to attract the investors
  • The delay in the allotment of the shares may hamper the interest of the investors
  • Some of the investors are very much interested in investing in preference share capital as the income or the profits generated in the business vary and so that they can get a fixed amount of returns from the investment that they have made.

Regulatory body

SEBI is the regulatory body for the primary and secondary market. SEBI along with the government of India have been making new reforms and measures so as to boost the primary market. Each and every movement in the Primary and secondary markets are monitored by SEBI.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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