Primary Stock Market: A Quick Guide
Primary Market is the portion of the capital market which handles recent securities. Some refer to it as Issue Market. By selling fresh bonds or shares, both the public sector and or private sector organizations can accumulate funds. Normally, small or medium scale companies involves themselves in the market of current securities in order to broaden the scope of their businesses. The practice of selling current securities to interested investors is called underwriting. The security trader earns a commission that is counted in the expenses of the securities. A lot of official procedures are needed before a security can be sold. A few of the crucial features of Primary Market includes:
It is the market that takes care of new long-term securities and not the existing ones. Which means, these are the securities sold in the Primary Market for the first time.
The investors buy the securities directly from the company selling it. But, it is not like in the Second Market.
New security certificates are provided to the investors once they have given money to the company.
The companies would either start a new business or expand existing ones using the funds from selling securities.
In the economy, it helps assist the building of capital. Thereby, It has a great effect on the economic sector.
It does not accommodate for other new long-term external finance sources like financial institution loans.
Only the genuine bearer of the securities is eligible to possess the sold issues or securities.
The initial source of any updates about the incoming shares is the Primary Market. Methods in issuing the securities in the Primary market includes the following:
First public offering: This refers to the introduction of securities by a private company to the public sector. The Primary Market usually has the small and young companies as its members. Although, large-scale private companies that seek to be publicly dealt also become a member of this trading area.
For existing companies, Rights issue: It pertains to a special form of shelf registration or shelf offering. Under a particular time and price, the shareholders possess the benefit of freedom to purchase a specified number of new shares from the firm under these rights. It is the complete opposite of primary public offering wherein the shares are supplied to the general public using the stock exchange.
Privileged issue: Designated buyers have issues kept aside for them. For example, the laborers of the issuing company.
In the Primary Market, the investment banks are huge players. They give the starting price range for a specific security and provides direction of the sale to the investors.
The securities are disclosed to the public. It is also known as going public or public issue.