Primary market is a market place where buyers and sellers come together to deal in brand new securities. Since first hand securities are dealt in the primary market, it is also known as “ New Issue Market ”.
According to NASDAQ, primary market is a marketplace where a newly issued security is first offered. Selling securities for the first time is a very complex procedure and requires the assistance of many intermediaries like Merchant Banker, Underwriters, Registrars to the issue etc. These intermediaries can offer their assistance only after getting registration certificate from the SEBI ( Securities and Exchange Board of India ) and are also obliged to protect the interest of investors.
Features of Primary Market
- It is a market place for brand new securities. In other words, investors directly buy securities from the issuer.
- primary market is a major source of finance for the new as well as for the existing companies.
- In the primary market, capital can be raised in many forms such as offer for sale, private placement, right issue etc.
- Primary market helps companies to acquire capital for a very long period.
Functions of Primary Market
(1) Mobilization of Funds – Primary market plays intermediary role between the public and companies. It is a platform whereby savings of individual become the source of funds for the companies. This transmission of funds creates a win win situation for both the parties because savers idle money generates earning for them in the form of dividend or interest and companies ‘ capital needs also get fulfilled.
(2) Capital Formation – Large companies require huge amount of funds for their successful operation such as expansion programs etc. Primary market helps companies in the acquisition of required funds from the public across the country / world by issuing securities.
(3) Origination – Raising money from the open market is an irreversible and risky job as it requires huge amount of time and money. Therefore, companies have to be very careful while acquiring money from the market. Origination is the most prominent step wherein specialised agencies investigate the technical, economic, financial and legal aspects of the company and find out the answer of following questions –
- Type of instruments to be issued – There are many instruments available in the market i. e. equity shares, debentures, preference shares etc. Every instrument has its pros and cons such as preference shares have to be redeemed after the expiry of stipulated time, debentures demand regular interest payment and redemption as well and equity shares increase holders ‘ interference in the companies ‘ working. So first of all, Companies must choose the most suitable instrument for the acquisition of capital..
- Selling price of an Instrument – Price at which securities must be offered to the public is a very crucial decision. Companies while choosing the selling price must consider their own goodwill.
- Timings – Companies must consider the economic condition of the market while issuing new securities in the market.
(4) Underwriting – It is an agreement wherein financial institutions known as underwriters guarantee the issuer for buying unsold portion of the issue size.
(5) Distribution – This is the last function of primary market ( performed by brokers or agents ) which includes the delivery of securities from the issuer to the buyer