I. Introduction
The share market can be categorized into two types: primary market and secondary market. The primary market is a crucial part of stock/share investment. The functions of primary market must be thoroughly understood if you want to participate in the share market. However, don’t panic; we’ve got you covered.
A. Definition of primary market
By definition, a primary market refers to a marketplace where companies issue new stocks or securities that have not been traded or exchanged on any other platform before. So, the primary market is a part of the capital market that deals with the issuance of new securities. The selling is directly from the issuers. There are three primary entities that participate in the primary market: the company or issuer, the underwriter, and the investor.
B. Importance of primary market
If you want to learn about the functions of the primary market or the basic concept of the primary market, you must understand its importance in the financial landscape. The primary market plays a key role in helping companies issue new stocks and sell them directly to investors. This is important in relation to increasing the company’s capital essential for future growth and expansion. Also, the primary market enables investors to invest in new stocks and diversify their portfolios.
II. Functions of primary market
The primary market has certain features or functions that you must know about before you enter the market. Below, we will discuss these functions of the primary market in detail.
A. Raising capital for new projects
One of the most important and primary functions of the primary market is raising capital for new projects. In addition to helping companies to fund new business ventures, the primary market also helps execute day-to-day operations or pay off existing business debts.
B. Mobilization of savings
Mobilization of savings is a crucial function of the primary market. Common people’s funds or savings are mobilized by investing in various channels. Investment options are created for monetary resources so that companies can raise capital for business growth.
C. Offering new issue
Another essential function of the primary market is to offer new issues of stocks or shares. This is the only marketplace where government and non-government companies can issue new stocks/shares that they can sell directly to the investors. Henceforth, the primary market also facilitates offering new stocks to the investors to invest in.
D. Underwriting
Underwriting is also one of the core functions of the primary market, apart from offering new issues. The job of an underwriter is quite important. It includes purchasing unsold shares when it fails to sell the required number of shares to the public.
E. Facilitating investment in new ventures
Last but not least, facilitating investment in new ventures is also one of the important functions of the primary market. The primary market enables government and non-government companies to issue new shares to increase capital and support their day-to-day activity as well as new business ventures. Therefore, the market also enables investors to invest in the new projects or ventures of the government and non-government companies by purchasing the newly issued securities.
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III. Types of issues in the primary market
Now that we know the different functions of the primary market, it is time to understand what its various offerings include. Below we will cover the different types of issues in the primary market.
A. Initial Public Offerings (IPOs)
One of the main types of issues in the primary market is the public issue or Initial Public Offerings (IPOs). It is also one of the most common types of issuing methods for securities of a company or government to the public. These securities are listed on the stock exchange for trade. A private company gets converted into a publicly traded company when its shares are issued as IPOs.
B. Follow-on Public Offerings (FPOs)
Like IPOs, Follow-on Public Offerings, or FPOs, are also a common type of issuing method for securities in the primary market. The shares or equity shares issued by the company to the public after issuing IPOs are called FPOs.
C. Rights issue
The rights issue is another popular method of issuing securities in the primary market. Rights issues refer to the stock issued only to the long-term investors or participants of the business at a discount price/rate due to their ‘right’ in the company. This serves as an encouragement to them to buy more shares.
D. Preferential issue
The preferential issue is another type of issuing method used in the primary market. It is one of the quickest methods of raising capital for any company. Both listed and unlisted companies can issue these convertible securities to a select group of investors. They are neither right nor public securities. It is the bulk allotment of fresh shares to a specific group of individuals, venture capitalists or companies.
E. Private placement
Lastly, as the name suggests, private placement is the securities issuing method that allows companies to issue securities to a select or small group of investors. These securities are not available publically and only selected investors have the right to sell or hold these stocks.
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IV. Participants in the primary market
The primary market is a part of the capital market that facilitates the issuing of new securities and trading them. The market has several participants who execute the functions of the primary market. Here are the common participants or entities of the primary market.
A. Issuers
The first and most important participant of the primary market is the security insurer, such as government and non-government companies.
B. Investors
Another essential participant of the primary market is investors, which means those who purchase and trade shares for profit.
C. Underwriters
The primary market also involves underwriters who underwrite the security and offer advisory support to companies.
D. Regulatory authorities
Lastly, the regulatory authority, such as the Securities and Exchange Board of India or SEBI, is another essential participant who monitors the entire trade. It ensures that the market and all the other participants follow rules and regulations properly.
V. Process of issuing securities
One must learn about the issuance of new securities to understand the functions of the primary market. Below is the issuance process for new securities.
A. Preparation
A prospectus of new issuance of securities is prepared by the issuer and filed with the regulatory authority. This document includes information such as the financial performance of the issuer, risks, terms and conditions.
B. Regulatory approval
After that, the new issues go through the regulatory approval process. The issuer can hire underwriters and lead managers at this stage to ensure regulatory compliance.
C. Marketing and roadshows
Underwriters and lead managers also help the issuer to market the new issue to the investors. Marketing the issues is crucial to understand the market demand.
D. Pricing and allocation
Next, underwriters engage in the pricing and allocation process. The prices of the newly issued securities depend on the market demand and the financial health of the issuer. After deciding the price, the issues are made available for subscription and allocation.
E. Listing on stock exchange
Finally, new securities are listed on the stock exchange after they are allocated to the investors. This allows investors to purchase and sell these securities in the secondary market.
VI. Advantages and disadvantages of primary market
Like other market types, the primary market also has pros and cons. Knowing the advantages, and disadvantages is essential for a smooth investing experience.
A. Advantages
● The primary market offers higher returns.
● Diversification can be achieved in the primary market.
● The price of securities is usually decided before an IPO and is not impacted by market fluctuations.
● Investors also stand the chance to receive capital appreciation if the company does well.
B. Disadvantages
● The securities market usually offers limited information about the future prospects and financial performance of a company.
● The initial lock-in period in the primary market can create a lack of liquidity.
● The primary market securities can be overvalued which is not suitable for small investors.
VII. Role of regulatory bodies
Regulatory bodies, exchange boards and financial advisors play a crucial role in the primary market. They ensure fair market practices.
A. Securities and exchange board
The Securities and Exchange Board of India or SEBI is the regulatory authority of the primary market in India. It protects investors’ interests and monitors the issuance of new securities. The authority also regulates the primary market.
B. Stock exchanges
Stock exchange boards list security issuer companies and help investors choose the right company for purchasing securities.
C. Financial advisors
Financial advisors are mainly important for beginner investors. They help investors make strategic and informed choices when investing in primary market securities.
VIII. Case studies and examples
Examples and case studies are the best way to understand the functions of the primary market. In this section we offer a few.
A. Successful IPOs
Paytm, a financial services and digital payment provider, offered its IPO in 2022. Paytm IPO is considered a successful primary market example. It helped the company raise funds for business expansion. It also provided its investors with a chance to participate in the financial growth of the company.
B. Challenges faced by issuers
Industry-specific challenges, market downturns, and other such factors can negatively impact primary market securities. Also, investors enter a lock-in period when they buy primary market securities. Insufficient information about the company or the securities and a common distrust of the market make investors skeptical about these stocks creating challenges for issuers.
IX. Conclusion
The primary market is an important part of the capital market. Most of the trades of the secondary market rely on it. The primary market is where companies and government organizations issue new securities to raise capital for business needs.
A. Summary of key points
A primary market is a marketplace where companies and government organizations issue new securities that investors can directly purchase and trade. The market has several issuing methods such as public, follow-up public, private, rights and bonuses and more. Also, the market has several participants including issuers, investors, underwriters and regulatory authorities. In addition to that, the primary market has its unique advantages and limitations.
B. Future outlook of the primary market
Above, we have discussed the functions of the primary market along with other essential details you might need to know before entering the market. Remember, the primary market always offers great opportunities for both issuers and investors. If you equip yourself with essential information about the market, you can make the most out of this dynamic investment marketplace.
FAQs
1. What is the primary function of the stock market?
The primary function of the stock market is to allow governments and private companies to raise funds by issuing new securities. Underwriting helps to decide these securities’ initial prices. Investors can buy these securities from issuers.
2. What are the 4 functions of a stock market?
The 4 main functions of a primary stock market are as follows:
● Facilitating issuance of new securities
● Raising funds through securities
● Underwriting for price allocation of securities
● Investment in new projects
3. What are the types of markets and their functions?
There are two types of markets: primary and secondary. The functions of primary markets are: to facilitate the issuance of new securities and allow companies to raise capital directly from investors through IPOs. Secondary markets, like stock exchanges, enable the buying and selling of existing securities between investors, providing liquidity, price discovery, and a platform for continuous trading of assets.
