8/5/22, 10:51 AM Primary Market - Definition, Types & Functions of Primary Market

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Primary Market

In a primary market, securities are created

for the first time for investors to purchase.
New securities are issued in this market
through a stock exchange, enabling the
government as well as companies to raise
capital.
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For a transaction taking place in this market, for free

there are three entities involved. It would

include a company, investors, and an INVEST NOW

underwriter. A company issues security in a

primary market as an initial public offering
(IPO), and the sale price of such new issue is Stocks
determined by a concerned underwriter,
National Stock Exchange
which may or may not be a financial
institution. An underwriter also facilitates Bombay Stock Exchange

and monitors the new issue offering. What is SENSEX

Investors purchase the newly issued
Stock Exchange
securities in the primary market. Such a
Multibagger Stocks
market is regulated by the Securities and
Exchange Board of India (SEBI). Penny Stocks

Stock Broker
The entity which issues securities may be
Stock Trading
looking to expand its operations, fund other
business targets or increase its physical Nifty
presence among others. Primary market Mid Cap Stocks
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example of securities issued includes notes,

Small Cap Stocks
bills, government bonds or corporate bonds
as well as stocks of companies. Large Cap Stocks

Blue Chip Stocks or Companies

Functions of Primary Market Stock Market Timings

NSE Holidays
The functions of such a market are manifold
– BSE Holidays

Intraday Trading
New issue offer
Equity Share Capital

The primary market organises offer of a new Growth Stocks

issue which had not been traded on any
other exchange earlier. Due to this reason, it Stock Market Indicies
is also called a New Issue Market.
Organising new issue offers involves a S&P BSE SENSEX

detailed assessment of project viability, S&P BSE 100

among other factors. The financial NIFTY 100
arrangements for the purpose include
NIFTY 50
considerations of promoters’ equity, liquidity
ratio, debt-equity ratio and requirement of NIFTY MIDCAP 100
foreign exchange. NIFTY BANK

NIFTY NEXT 50
Underwriting services

Underwriting is an essential aspect while

offering a new issue. An underwriter’s role in
a primary marketplace includes purchasing
unsold shares if it cannot manage to sell the
required number of shares to the public. A
financial institution may act as an
underwriter, earning a commission on
underwriting.

Investors rely on underwriters for

determining whether undertaking the risk
would be worth its returns. It may so thus
happen that an underwriter ends up buying
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all the IPO issue, and subsequently selling it

to investors.

Distribution of new issue

A new issue is also distributed in a primary

marketing sphere. Such distribution is
initiated with a new prospectus issue. It
invites the public at large to buy a new issue
and provides detailed information on the
company, issue, and involved underwriters.

Types of Primary Market

Issuance

After the issuance of securities, investors

can purchase such securities in various
ways. There are 5 types of primary
market issues.

Public issue

Public issue is the most common method of

issuing securities of a company to the public
at large. It is mainly done via Initial Public
Offering (IPO) resulting in companies raising
funds from the capital market. These
securities are listed in the stock exchanges
for trading.

A privately held company converts into a

publicly-traded company when its shares are
offered to the public initially through IPO.
Such public offer allows a company to raise
funds for expansion of business, improving
infrastructure, and repay its debts, among
others. Trading in an open market also
increases a company’s liquidity and provides
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increases a company s liquidity and provides
a scope for issuance of more shares in
raising further capital for business.

The Securities and Exchange Board of India

is the regulatory body that monitors IPO. As
per its guidelines, a requisite due enquiry is
conducted for a company’s authenticity, and
the company is required to mention its
necessary details in the prospectus for a
public issue.

Private placement

When a company offers its securities to a

small group of investors, it is called private
placement. Such securities may be bonds,
stocks or other securities, and the investors
can be both individual and institutional.

Private placements are easier to issue than

initial public offerings as the regulatory
stipulations are significantly less. It also
incurs reduced cost and time, and the
company can remain private. Such issuance
is suitable for start-ups or companies which
are in their early stages. The company may
place this issuance to an investment bank or
a hedge fund or place before ultra-high net
worth individuals (HNIs) to raise capital.

Preferential issue

A preferential issue is one of the quickest

methods available to companies for raising
capital. Both listed and unlisted companies
can issue shares or convertible securities to
a select group of investors. However, the
f ti l i i
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8/5/22, 10:51 AM Primary Market - Definition, Types & Functions of Primary Market
preferential issue is neither a public issue
nor a rights issue. The shareholders in
possession of preference shares stand to
receive the dividend before the ordinary
shareholders are paid.

Qualified institutional placement

Qualified institutional placement is another

kind of private placement where a listed
company issues securities in the form of
equity shares or partly or wholly convertible
debentures apart from such warrants
convertible to equity shares and purchased
by a Qualified Institutional Buyer (QIB).

QIBs are primarily such investors who have

the requisite financial knowledge and
expertise to invest in the capital market.
Some QIBs are –

Foreign Institutional Investors registered

with the Securities and Exchange Board of
India.

Foreign Venture Capital Investors.

Alternate Investment Funds.

Mutual Funds.

Public Financial Institutions.

Insurers.

Scheduled Commercial Banks.

Pension Funds.

Issuance of qualified institutional placement

is simpler than preferential allotment as the
former does not attract standard procedural
regulations like submitting pre-issue filings
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regulations like submitting pre issue filings
to SEBI. The process thus becomes much
easier and less time-consuming.

Rights and bonus issues

Another issuance in the primary market is

rights and bonus issue, in which the
company issues securities to existing
investors by offering them to purchase more
securities at a predetermined price (in case
of rights issue) or avail allotment of
additional free shares (in case of bonus
issue).

For rights issues, investors retain the choice

of buying stocks at discounted prices within
a stipulated period. Rights issue enhances
control of existing shareholders of the
company, and also there are no costs
involved in the issuance of these kinds of
shares. For bonus issues, stocks are issued
by a company as a gift to its existing
shareholders. However, the issuance of
bonus shares does not infuse fresh capital.

Examples of Primary Stock Market

Selling

Company Details

Facebook One of the remarkable IPOs

that were undertaken
includes the Facebook initial
public offering. The offer
initiated in 2012 is to date
the largest IPO in the
technology sector. The
company successfully
raised $16 billion through its
initial public offering. As an
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p g Primary Market - Definition, Types & Functions of Primary Market
effect, its turnover increased
by close to 100%.
Also, there was a high
demand for the stock in the
primary market, which led to
the pricing of Facebook’s
stock to be fixed at $38 for
each share as determined by
the underwriters. The
valuation of the stock
eventually amounted to
$104 billion, highest for a
newly formed public
company.

Coal The biggest IPO undertaken

India in India was by Coal India in
2010, which raised Rs.
15,200 Crore. 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.

Furthermore, the Union Budget 2020-2021

also proposed the sale of a part of the
government’s stake in Life Insurance
Corporation. Even a 10% stake sale may
fetch Rs. 80,000 crore to the government.
Listing of the insurer will thus make it the
biggest initial public offer in India
surpassing Coal India IPO.

Advantages of Primary Market 

Companies can raise capital at relatively

low cost, and the securities so issued in
the primary market provide high liquidity
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t ep ay a et p o de g qu d ty
as the same can be sold in the secondary
market almost immediately.

The primary market is an important

source for mobilisation of savings in an
economy. Funds are mobilised from
commoners for investing in other
channels. It leads to monetary resources
being put into investment options.

Chances of price manipulation in the

primary market are considerably less
when compared to the secondary market.
Such manipulation usually occurs by
deflating or inflating a security price,
thereby deliberately interfering with fair
and free operations of the market.

The primary market acts as a potential

avenue for diversification to cut down on
risk. It enables an investor to allocate
his/her investment across different
categories involving multiple financial
instruments and industries.

It is not subject to any market

fluctuations. The prices of stocks are
determined before an initial public
offering, and investors know the actual
amount they will have to invest.

Disadvantages of Primary Market

There may be limited information for an

investor to access before investment in
an IPO since unlisted companies do not
fall under the purview of regulatory and
disclosure requirements of the Securities
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disclosure requirements of the Securities
and Exchange Board of India.

Each stock is exposed to varying degrees

of risk, but there is no historical trading
data in a primary market for analysing IPO
shares because the company is offering
its shares to the public for the first time
through an initial public offering.

In some cases, it may not be favourable

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

With this information regarding the primary

market, individuals can make a well-thought-
out decision regarding investment in the
market. It also makes way for the creation of
an investment portfolio with diversified risk.

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