Primary Market

The stock market operates through two main segments: the primary market and the secondary market. While the secondary market facilitates the buying and selling of existing securities, the primary market is where companies raise fresh capital by issuing new shares, bonds, or other instruments to investors. Understanding the structure, types, and examples of the primary market helps investors and market participants comprehend how companies access public funding.

The primary market is the financial market where companies, governments, or public sector institutions issue new securities directly to investors. The purpose is to raise capital for business expansion, debt repayment, or project funding.

Key characteristics of the primary market include:

• Securities are issued for the first time.
  

• Funds go directly to the issuing entity.
  

• Issuance is generally facilitated through merchant bankers and underwriters.
  

The primary market is a critical step in the capital formation process because it allows businesses to tap into public investments and supports economic growth.

Primary market transactions take different forms depending on the purpose and structure of fundraising. These are the most common types:

Initial Public Offering (IPO)

An IPO is when a private company issues shares to the public for the first time to become publicly listed.

• Companies use IPOs to raise capital for growth and expansion.
  

• Investors gain an opportunity to become shareholders from the very first issuance.
  

Follow-on Public Offering (FPO)

An FPO occurs when a listed company issues additional shares to raise more funds.

• Unlike IPOs, FPOs are done by companies already traded on stock exchanges.
  

• They often help companies strengthen their balance sheets or finance projects.
  

Rights Issue

In a rights issue, a company offers additional shares to existing shareholders at a discounted price.

• This maintains shareholder ownership proportion.
  

• Rights issues are often used for debt reduction or project financing.
  

Private Placement

Private placement is a method of raising capital where a company offers its securities directly to a limited pool of investors, typically institutions or high-net-worth individuals, instead of making a public offering.

• It is faster and less regulated than a public issue.
  

• Companies use it to raise funds without incurring heavy listing costs.
  

Preferential Allotment

In this method, shares are allotted to a specific group of investors, such as promoters or strategic investors.

• It allows companies to raise funds quickly.
  

• Regulatory norms ensure transparency in the allotment process.

To better understand how the primary market works, here are some examples:

• A startup launching its first IPO on the National Stock Exchange (NSE).
  

• A listed company conducting an FPO to fund a new manufacturing plant.
  

• A bank issuing bonds directly to institutional investors through private placement.
  

These Examples show how the primary market channels funds from investors to issuers, facilitating business growth.

The primary market serves multiple purposes in the economy:

• Capital Formation: Enables businesses to fund growth projects.
  

• Investment Opportunities: Offers investors access to new securities.
  

• Economic Growth: Mobilises savings into productive sectors.
  

• Market Expansion: Helps companies expand operations by accessing public funds.

• Capital Generation: It helps companies and governments raise funds directly from investors to support growth, projects, or reduce debt.
  

• Fair Pricing: Investors get the opportunity to buy securities at the original issue price before they are traded on the stock exchange.
  

• Transparency: New issues are regulated and monitored, ensuring clear information is provided to investors.
  

• Market Expansion: It introduces new companies and instruments, increasing investment choices.
  

• Economic Support: By channeling public savings into businesses, it supports overall economic development.

• Market risk: New issues are affected by overall market and economic conditions.
  

• Low liquidity: Investments often have a lock-in period and cannot be sold immediately.
  

• Limited information: Investors may not get complete details about the issuing company.
  

• High volatility: Newly listed securities can experience sharp price fluctuations.
  

The primary market is the foundation of the capital market, enabling companies and governments to raise funds by issuing new securities. While it presents opportunities for investors to participate in the early stages of ownership, its main function is to ensure a continuous flow of capital into the economy.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.