What is the meaning of Primary Market?

Our Advisory Team at A1 Intraday Tips as explained the meaning of Primary Market in the below which is very useful for investors / traders in share market. The Primary market is a market where securities/ shares of a company are created in Indian Capital Market. It's in this market that a company sell new stocks or bonds to the public for the first time. An initial public offering, by a company which is called as IPO, is an example of a primary market. Primary market is also known as IPO (initially public offer) is the part of Indian Capital market.

Capital Market

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.

Our Indian Capital Market can be divided in to two part :

• Primary Market
  
• Secondary Market.
  

Meaning of Primary Market

A Primary Market is a Market where Stock/Shares, Bond and other securities are offered first time to the Public by the Issuer (company) or the Investment Bankers. The Primary Market is a place where securities or shares are created by way of IPO (Initially Public Offer ) or even by the private placement. Primary market helps investors invest their savings and extra funds in new companies. You can also say that a Primary market provides a link between the savings/investors and the wealth creators in the economy.

How Capital is raised to invest in Primary Market?

There are various methods to raise the capital in the primary market in India. The Company can raise the capital in the Primary Market through various methods. The methods include public issues, offer for sale, private placement, right issue and tender method. This is the most popular method of raising long term capital. It means raising funds directly from the public. IPO (Initially public offer) is the most popular method of raising capital / funds directly from the public to be invested in primary market. Stock exchanges like NSE / BSE Represent the secondary markets, where investors buy and sell from one another.

Types of Primary Market and Instrument of Primary Market

Generally there are four types of Instrument of Primary Market

• IPO ( Initially public offer)
  
• Right Issue
  
• Bonus Issue
  
• Private Placement
  

Following are the methods of raising capital in the Primary Market

• Public Issue

  Under this method, the company issues a prospectus and invites the general public to purchase shares or debentures via IPO or FPO. Initial Public Offering (IPO) refers to an offer of securities made to the public for subscription, by the company. Follow-on Public Offering (FPO) means an offer of securities for subscription to public, by an publicly traded enterprise.
  
  

• Right Issue

  This method is used by those companies who have already issued their shares. When an existing company issues new shares, first of all it invites its existing shareholders. This issue is called the right issue. In this case, the shareholder has the right either to accept the offer for himself or assign a part or all of his right in favor of another person.
  
  

• Bonus Issue

  Bonus issue refers to that issue in which company gives shares free of cost to its existing shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares.
  
  

• Private Placement

  Private Placement of Shares refers to the sale of shares of the company to the investors and institutions that are selected by the company which generally includes the banks, mutual fund companies, wealthy individual investors, insurance companies, etc rather than issuing it in the open market for the public. This method is preferred as it is a cheaper method of raising funds as compared to a public issue.
  
  

Function's & Activities of the Primary Market

The Main function of the primary market is to facilitate capital growth by allowing individuals to convert savings into capital investments. Primary Market facilitates companies to issue new stocks/securities to raise money directly from households/ Individuals. This raised money can help with research and development, pay off debt, handle operative costs and even help in planning expansion. Since the securities are issued directly by the company to its investors, the company receives the money and issues new security certificates to the investors. The primary market plays the very important function of the capital formation the economy. The securities/ shares issued at the primary market can be issued in face value, premium value, and at par value to be traded in the secondary market.

• To raise funds to achieve financial goals of companies in the economy.
  
• To create market for new issues of stocks/bonds/fund etc.
  
• To Establish the magnitude of the stock market.
  
• To mobilize Resources for the development in the economy.