PRIMARY MARKET | MEANING, FEATURES AND METHOD OF RAISING FUNDS

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The primary market is the marketplace for new long-term capital. It is the first offering of securities to investors before being traded in the secondary market.

It is the section of the capital market where new securities are sold for the first time. 

Therefore it is also called New Issue Market (NIM). In a primary market, companies sell securities directly to investors and use these funds to purchase capital goods like machinery, buildings, etc

Common securities issued in the primary market are issues are government bonds, equity shares, debentures, and corporate bonds.

Companies use primary market funds to expand and modernize their existing business. In addition to that, the primary market can also be used to pay off debt and improve the capital structure of the business

The primary market performs the crucial function of facilitating capital formation in the economy.

It is important to note that certain sources of new long-term external funds, such as loans from financial institutions, are not included in the primary market. 

Furthermore, borrowers in the primary market may be raising capital to convert private capital into public capital, this is known as "going public".

Features Of The Primary Market

1. New issue: The primary market is the section of the capital market where new medium and long-term securities that have not been traded beforehand are issued.

2. Money goes to the company: When an investor buys shares directly in the primary market, he or she is buying directly from the corporation. Hence, the money goes directly to the issuing company.

3. Capital formation: The Primary market directly contributes to capital formation as companies get funds directly from prospective investors and use these funds to buy capital goods such as machines. equipment, buildings, etc.

4. Mainly for large investors: Most securities in the primary market are usually sold to institutional investors and large investors. Hence, it is primarily a market for large investors. 

5. Securities pricing: The price of Securities in the primary market is determined by underwriters and issuing companies based on the fundamental analysis of the company concerned.

Method Of Raising Funds In The Primary Market

1. Offer for sale: This is a method of raising funds in the capital market in which new securities are sold to the general public through an intermediary who purchases the entire quantity of securities from the issuing business.

In this method, the issuing firms sell the whole issue of shares or debentures to an issue house or merchant banker at a settled price, which is usually below the par value. 

The shares or debentures are then resold to the general public by the issuing house/merchant bankers.

2. Offer through prospectus: This is the most used method of raising funds in the capital market, where the issuing company invites investors to invest directly in the company.

To achieve this, the company usually issues a prospectus to inform and attract the general public. The prospectus will contain information such as the financial position of the business, the past financial performance of the business, etc.

3. Right issue: This is mainly for existing shareholders of the business. Here, the company issues securities to existing shareholders. 

Indeed, The right issue is so named because it is the shareholders' pre-emptive right that the corporation must offer them new issues before subscribing to outsiders.

4. Private placing: This is a way of acquiring capital in the primary market in which corporations sell securities directly to institutional investors such as insurance companies, banks, mutual funds, and other private investors.

The securities are subsequently sold to a selected client at a higher price.

Small companies and new companies usually use this method as they do not have to pay underwriter fees, agent commissions, and other expenses associated with raising funds.

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