The primary market is the financial market where new securities are issued and become available for trading by individuals and institutions. The trading activities of the capital markets are separated into the primary market and secondary market.
The primary market is where companies issue a new security, not previously traded on any exchange. A company offers securities to the general public to raise funds to finance its long-term goals. The primary market may also be called the New Issue Market (NIM). In the primary market, securities are directly issued by companies to investors. Securities are issued either by an Initial Public Offer (IPO) or a Further Public Offer (FPO).
An IPO is the process through which a company offers equity to investors and becomes a publicly-traded company. Through an IPO, the company is able to raise funds and investors are able to invest in a company for the first time. Similarly, an FPO is a process by which already listed companies offer fresh equity in the company. Companies use FPOs to raise additional funds from the general public.
Raising Funds from the Primary Market
Below are some of the ways in which companies raise funds from the primary market:
1. Public Issue
This is the most common way to issue securities to the general public. Through an IPO, the company is able to raise funds. The securities are listed on a stock exchange for trading purposes.
2. Rights Issue
When a company wants to raise more capital from existing shareholders, it may offer the shareholders more shares at a price discounted from the prevailing market price. The number of shares offered is on a pro-rata basis. This process is known as a Rights Issue.
3. Preferential Allotment
When a listed company issues shares to a few individuals at a price that may or may not be related to the market price, it is termed a preferential allotment. The company decides the basis of allotment and it is not dependent on any mechanism such as pro-rata or anything else.
The secondary market is where existing shares, debentures, bonds, etc. are traded among investors. Securities that are offered first in the primary market are thereafter traded on the secondary market. The trade is carried out between a buyer and a seller, with the stock exchange facilitating the transaction. In this process, the issuing company is not involved in the sale of their securities.