What is Primary Market? Functions of Primary Market

 The primary market, also known as the new issue market, is where new securities are issued and sold to investors for the first time. This market plays a crucial role in the overall capital market system. The primary market serves as a platform for companies and governments to raise capital by issuing new stocks or bonds. Here are the meaning and functions of the primary market:

### Meaning of Primary Market:

**1. New Securities Issuance:**

   - The primary market is where newly issued securities, such as stocks and bonds, are offered to the public for the first time.

**2. Capital Formation:**

   - Companies and governments use the primary market to raise capital to fund their operations, projects, and other financial needs.

**3. Initial Public Offerings (IPOs):**

   - IPOs occur when a private company decides to go public by offering its shares to the public for the first time. This process takes place in the primary market.

**4. Direct Interaction:**

   - Investors can directly participate in the primary market by purchasing new securities from the issuing entity.

### Functions of Primary Market:

**1. Capital Mobilization:**

   - The primary function of the primary market is to mobilize capital for companies and governments. By issuing new securities, entities can raise funds for expansion, research, development, and other purposes.

**2. Facilitating IPOs:**

   - Companies seeking to become publicly traded can do so through an IPO on the primary market. This allows them to raise substantial capital and provides investors with an opportunity to become shareholders.

**3. Price Discovery:**

   - The primary market helps in determining the initial price of a security. Through the process of bidding and subscription, the market determines the fair value of the newly issued securities.

**4. Efficient Allocation of Capital:**

   - The primary market facilitates the allocation of capital to those entities with the most promising prospects. Investors, through their participation, express their confidence in the future performance of the issuing entity.

**5. Providing Liquidity:**

   - While the primary market is where securities are first issued, it indirectly contributes to liquidity in the secondary market. Once securities are issued and traded, they can be bought and sold on the secondary market.

**6. Transparency:**

   - The primary market operates in a regulated environment, ensuring transparency and fairness. Companies are required to disclose relevant information to potential investors through prospectuses and other documents.

**7. Corporate Growth and Development:**

   - For companies, the primary market serves as a means of raising funds for expansion, research, development, and other corporate activities. This contributes to the overall economic growth.

In summary, the primary market is a vital component of the capital market ecosystem, enabling entities to raise capital and investors to participate in the early stages of a security's life cycle. It plays a crucial role in fostering economic development and providing opportunities for both issuers and investo

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What is Primary Market? Functions of Primary Market

What is Primary Market?

what is new issue market are given below: ↓

Primary Market is a Market for new issue of securities, which are issued to public for first time. Primary market is also known as New Issue Market. It is used by both new and existing companies. The company issues new shares and debentures for collecting long term funds. The purchaser of new shares and debentures may be businessmen, customers of the company, employees of the company, existing shareholders, etc. The issue of securities is made through the prospectus. Functioning of primary markets facilitates the capital formation by channelizing of funds from individual savers into proper productive investments.

Functions of Primary Market

Functions of Primary Market in details are given in the image below. ↓

Image credits © Manoj Patil.

Role and functions of primary market are: ↓

1. Origination
2. Underwriting
3. Distribution

Features and functions of primary market are discussed below. ↓

1. Origination

In primary market, origination means to investigate, evaluate and procedure new project proposals. It initiates before an issue is present in the market. It is done with the help of merchant bankers.

The merchant bankers can be ↓

• banks,
• financial institutions,
• private investment firms, etc.

In primary market, the preliminary investigation involves a detailed study of economic, financial, legal, technical aspects to ensure the soundness of the project. The second function is performed by sponsoring institutions. They provide advisory service.

Advisory service includes: ↓

• Types of issue,
• Thug,
• Pricing,
• Methods of issue, etc.

2. Underwriting

In primary market, to ensure success of new issue, there is a need for underwriting firms. The company needs to appoint underwriters. They can be banks or financial institutions or specialized underwriting firms.

In primary market, underwriting can be done by a single underwriter or by a group of underwriters. Minimum subscription is guaranteed by underwriters. If the issue is completely subscribed, no liability would be left for the underwriters. If by chance any part of the issue remains unsold, afterwards the underwriter has no option, rather than buying all the unsubscribed shares.

3. Distribution

In primary market, the success of any grand new issue is hinges on the issue is being subscribed by the people. The sale of the securities to the supreme or highest investors is termed as distribution.

Distribution Job is given to brokers and dealers. The brokers or agents maintain direct contact with the supreme investors.