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. ↓

Functions of primary market

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.

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