In the world of finance, the market is divided into two types - Primary market and secondary market. Primary market refers to the market where securities are sold by the issuer, while in the secondary market, securities are traded among investors.

For investors, it is highly recommended that they understand how Primary and Secondary markets work. A thorough understanding of these markets will help investors to understand how stocks, bonds and other securities are traded. In this article, we will break down each and every aspect of Primary markets, so that it becomes easier for investors to understand the complex world of finance.

Primary Markets

In this market, issuers sell new stocks, bonds or other securities directly to the investors. A company issues securities in the primary market through an Initial Public Offering (IPO). The price at which the security should be offered to investors for purchase is determined by an underwriter. The underwriter is involved with the monitoring of the new issue till the day of the IPO launch. Primary market is regulated by the Securities and Exchange Board of India (SEBI).

For eg: ABC firm wants to raise Rs. 600 crores to expand its operations. Now, the company has so far raised money through loans, however the firm no longer wants to borrow and hence decides to raise the money through the equity route. ABC hires underwriters to assess the financial health of the company and sets the issue price of the stock. The underwriters detail that the issue price of the stock will be 150 rupees. Once the IPO goes live, Investors can then buy the IPO at this price directly from the issuing company.

Example: The IPO by Coal India in 2010 was the biggest IPO undertaken in India. Coal India raised Rs. 15,200 Crore via the IPO. The shares were listed at Rs. 287.75 and eventually increased to Rs.340. The company offered a 5% discount on the final IPO price to retail investors, along with the subsidiaries and employees of the company.

In the same way, businesses and governments might want to raise funds by generating debt capital by issuing new short and long-term bonds on the primary market. The new bonds are issued with a coupon rate based on the current interest rate at the time of the securities issuance.

Types of Primary Market issuance

There are largely 5 types of issuance in the primary markets

Public Issue: A privately held company becomes a publicly held company when a portion of its shares are offered to the public. It is the most common method of issuing securities of a company to the public and is done via the Initial Public Offering (IPO). These securities are then traded in the stock market. IPOs are monitored and regulated by SEBI and a company wanting to list their shares on the Indian stock markets will only be allowed to float the IPO if it meets all the requirements set by SEBI.

Preferential Share issue: It is one of the fastest methods of raising money by a company. WIth this procedure, shares or convertible securities can be issued by both listed or unlisted companies to a select group of investors. However, this is not a rights issue or a public issue. A preferential shareholder even if they don't have voting rights,have the right to be paid from the company assets before a common stockholder in case the company goes into bankruptcy.

Private Placement: Private Placement is when a company offers its securities to a small group of investors. The securities offered may be bonds, stocks or other securities, and the investors could be either individual and/or institutional. Private placements are easier to execute for the issuer as compared to initial public offerings as the regulatory stipulations are significantly less, so a company in need of urgent fundraising will prefer this to an IPO.

Advantages of Primary Market

1) Companies get to raise capital at competitive costs

2) Access to the secondary market, as securities bought in the primary market can be sold immediately in the secondary market

3) Lesser scope of price manipulation as compared to that in the secondary market

Disadvantages of Primary Market

1) Possibility of limited information available for an investor before investment in an IPO of an unlisted company

2) If a share is oversubscribed, small investors may not receive share allocation.

Reference used: https://www.investopedia.com/investing/primary-and-secondary-markets/

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