What is the Primary Market? Meaning, Functions, Advantages, and Disadvantages

What is the Primary Market?

1. Issuing Entities- Organizations raising capital by issuing new securities like stocks or bonds.
2. Investors- Institutional investors, mutual funds, and individual investors who purchase these securities.
3. Underwriters and Investment Banks- Entities that facilitate the issuance process, including underwriting, pricing, and marketing.

How the Primary Market Works

Types of Offerings in the Primary Market

1. Public Issue (IPO) - Offers securities to the general public, enabling companies to raise funds and list on stock exchanges. 
2. Private Placement- Targets select institutional or high-net-worth investors, offering confidentiality but limited liquidity. 
3. Qualified Institutional Placement (QIP) - Reserved for Qualified Institutional Buyers (QIBs) like mutual funds or insurers. 
4. Preferential Issue- Shares are issued to specific stakeholders, such as existing shareholders or strategic investors. 
5. Rights Issue- Additional shares are offered to existing shareholders at a discounted rate, maintaining ownership within the shareholder base. 
6. Bonus Issue- Free additional shares are distributed to existing shareholders, enhancing market liquidity.

Functions of the Primary Market

1. Facilitating Capital Formation- Enables companies to raise capital by issuing securities.
2. Underwriting Services- Guarantees the success of an issue by covering unsold shares.
3. Distribution of Securities- Disseminates securities through marketing campaigns and prospectuses.

Advantages of the Primary Market

• Capital Mobilization- Allows entities to raise capital efficiently.
• Economic Growth- Converts communal savings into investments, contributing to overall economic development.
• Reduced Price Manipulation- Unlike the secondary market, prices in the primary market are less influenced by speculation.

Disadvantages of the Primary Market

• Limited Information- Unlisted companies may not disclose sufficient data for risk assessment.
• Absence of Historical Data- Investors lack past trading performance to evaluate the security.
• Allocation Challenges- Oversubscription can limit small investors' share allotments.

Examples of Primary Market Transactions

1. Rights Issue- Tata Motors raised ₹9,040.56 crores in 2015 through a rights issue, channeling funds for debt repayment and corporate requirements.
2. Initial Public Offering (IPO) - Reliance Power launched a high-profile IPO in 2008, raising funds for its pan-India power generation projects.