What is Primary Market? Meaning, Functions, Advantages & Disadvantages

In the primary market, the issuers and purchasers of securities are directly involved in the sale process. In contrast to the secondary market, where previously issued securities are bought and sold, a primary market is a market for new issues of securities.

What is Primary Market?

New securities are issued in a primary market. A debt-based or equity-based security is an asset that companies, governments, and other organisations use to obtain financing. Investment banks set the beginning price range for securities and oversee their sale to investors in the primary markets.  

Meaning of Primary Market

The primary market is the place where securities are created. Companies float (in finance lingo) new stocks and bonds in this market for the first time. In the primary market, companies and government entities sell new shares, bonds, notes, and bills in order to finance business improvements and expansions. Though an investment bank may set the securities' initial price and receive a fee for facilitating sales, most of the proceeds go to the issuer. As opposed to a physical location, the primary market is more about the goods themselves. One of the primary characteristics of a primary market is that securities are purchased directly from an issuer - in contrast to being bought from a previous purchaser, or "second-hand." A strict set of regulations governs all issues on the primary market. In order to offer securities for sale to investors, companies have to file statements with the Securities and Exchange Commission (SEC) and other such agencies. Once all the stocks or bonds in the initial offering have been sold, the primary market closes. Secondary market trading then takes place.

Functions of Primary Market

The purposes of such a market are several: -

New issue offer

A primary market allows for the offering of new issues that have not previously been traded on other exchanges. Organising a fresh issue market involves, among other things, a thorough evaluation of the project's feasibility. As a result, a fresh issue market is also called a "new issue market." Financial arrangements are made specifically for the purpose and take into account promoters' equity, liquidity ratio, debt-equity ratio, and foreign exchange demand.

Services for underwriting

Underwriting is crucial when launching a new issue. Underwriters are responsible for acquiring unsold shares in a primary market if the company cannot sell the required number of shares. Financial institutions can earn underwriting commissions by acting as underwriters. In order to determine whether taking the risk and reaping the rewards is worth it, investors rely on underwriters. IPOs can be purchased by underwriters who sell them to investors.

New issue distribution

New issues are also distributed in a key marketing arena. These distributions begin with the issuance of a new prospectus. In it, the general public is invited to purchase a new issue, and detailed information about the issue, underwriters, and the firm is provided. Read More - Dos And Don'ts While Investing In Primary Market

Advantages of Primary Market

• Companies can raise capital at a relatively low cost, and the securities so issued in the primary market have high liquidity because they can be sold in the secondary market almost immediately.
• Primary markets are important for the mobilisation of savings in an economy. Communal savings are mobilised to invest in other channels. Investment options are financed by this.
• Compared to the secondary market, the primary market has considerably fewer chances of price manipulation. Manipulations such as these affect the fair and free operation of the market by deflating or inflating a security's price.

Disadvantages of Primary Market

• As unlisted companies do not fall under the Securities and Exchange Board of India's regulatory and disclosure requirements, investors may have limited access to information before investing in an IPO.
• There are varying degrees of risk with each stock, but IPO shares have no historical trading data in a primary market for analysis since the company is offering its shares for the first time through an IPO.
• Small investors may not always benefit from it. Small investors might not receive allocations if a share is oversubscribed.