A Short Note On Primary Market

The primary market refers to the financial institution where securities are created by the issuing entities. It is in the primary markets that firms float their equity, shares, bonds, convertibles etc., for the first time to the public. The objective of the instruments is to raise capital for various needs, including new projects, tech up-gradation etc. 

For instance, recently, Nykaa, a fashion brand in India, offered about Rs.5300 crores as IPO and offer of sale in the primary market. Similarly, in 2012  Facebook raised $16 billion by floating IPO  in the primary market. 

The prices of the instruments in the primary markets are fixed by the issuer in association with the investment bankers. Once the instruments have been offered at the primary market, now they can be traded and untraded at the secondary market like BSE Sensex, Nifty, Nikki etc. 

Types of issues: 

A range of financial instruments is floated at primary markets by the issuer to raise funds. Based on various characteristics, these instruments could be categorised into the following types: 

1. Public Issue:

When the shares of a specific company are issued to potential investors to make them part of the shareholding group, it is then known as a Public Issue. There are two types of Public Issue that can be offered:

• Initial Public Offer or IPO – IPO is issued when a businesses organisation lists its shares to the public for the very first time. It is a fundamental process which allows the concerned firm to be registered into the secondary market segment.

•  Follow on or Further Public Offer or FPO – When fresh shares are issued by a company that is already listed in the market is determined as an FPO

2. Bonus Issue:

When shares are offered to already present shareholders as per the portion of shares already occupied in the form of a bonus then it is known as a Bonus issue.

3. Private Placements:

When a business organisation issues shares not exceeding 49% of the total to a particular set of existing shareholders then it is known as private placement. 

Types of Issuer: 

Major entities issuing equity shares, convertible securities etc., in the primary markets could be categorised used into two groups, namely Corporate and Government. Corporates raise additional funds through various financial instruments for new projects, tech up-gradation, expansion of the firm, diversification and other needs. 

Governments across the globe raise funds to manage daily mismatch in revenue and receipt, ensure socio-economic developments, maintain liquidity, control inflation etc. The instruments used by the government include Treasury Bonds, Development bonds etc.  

Advantages:

There are multiple far-reaching benefits associated with the instruments of the primary markets, as follows:

1. Primary markets provide avenues to raise large amounts of capital at relatively low cost, ensuring the availability of high liquidity for business processes.

1. It leads to swift mobilisation of savings in the economy to foster speedy growth and development. It provides the nation with the requisite capital for short term and long term projects.

1. Likelihoods of price manipulation are very low as compared to secondary markets. This results in accuracy and transparency in price discovery and safer investment.

1. Primary markets provide an opportunity to cut down risk by diversification of their investment basket. Investors could invest in both public as well as private entities.

1. The price of shares is fixed beforehand by issuers. As a result, it eliminates any possibility of price fluctuation.

Disadvantages:

Despite multiple advantages, primary markets are susceptible to various limitations as follows : 

1. Lack of access to accurate and credible information concerning unlisted companies, as they are not available either with SEBI or in the public domain. 

1. The unavailability of historical trading data for companies offering initial public offers (IPO) leads to increased risk.

1. Investment requirements in primary markets are very high. As a result, the primary market is not favourable for small investors.

Conclusion

Therefore, the primary market is the avenue to create and float various instruments, such as bonds, equity etc., for the first time to the public. Major issuers in the primary market include both private as well as government entities. Several instruments such as Public issues, Rights issues, Bonus issues, among others, are offered in this market. 

The primary market has several advantages like low cost of raising funds, transparency and accuracy in the discovery of price, low chances of manipulation etc. Despite advantages, primary markets also suffer from many limitations like unavailability of historical trade data related to the unlisted firms, a very high threshold for investments etc. 

Once offered at the primary market, it paves the way to the secondary markets where instruments could be traded and re-traded.