Basics of Stock Market - Beginner

Primary Market

What is the Primary Market?

The New Issue Market is also known as this market. This is the part of capital market that deals directly with the issuers of securities. Investors can buy securities that have never been traded before.

In order to raise capital, the securities are first issued by companies. This is also called Initial Public Offering. The primary market allows companies, governments and public sector institutions to raise funds by selling new bonds or stock issues. The primary market creates and sells securities.

You can issue the issue in a number of ways: public, private, preferential, rights or bonus.

While a public issue doesn't limit investors (individuals, corporations, and organizations), private placement entitles a select few to invest.

  • Allotment to more than 200 persons becomes public allotment
  • Private allotment is made to less than 200 persons.

The securities are directly issued to investors by companies. Therefore, the company receives the money from the investor and issues a certificate of security.

Securities issued to investors on the primary market in:

  • Face value
  • Premium value
  • Par value

After the closing of the issue of securities, the securities can be traded on the secondary markets, such as the stock exchange, bond market, or derivative exchange.

Types of issues on the Primary Market

  • Public Issue:

    A company that sells its securities to raise funds through an issue document. Further, it can be classified as:

    1. Initial Public Offer: an abbreviation for Initial Public Offering, it's when a company issues a new issue of securities to the public.
    2. FPO FPO refers to a Follow on Public Offer. It is when a publicly limited company, which is already listed on an exchange, issues additional shares to the public.
  • Rights Issue

    It is called the right issue when a company listed makes an issue only to existing shareholders.

  • Preferential issue

    A preferential issue is when a company lists securities for a select group of people in order to raise additional money.

Why does a company issue shares to the public?

To raise capital for expansion, companies turn to the primary markets. Each company needs capital to expand and grow.

Capital can be represented as:

  • Equity is also known as share capital.
  • It is the amount of loans that the business has taken.

The primary market funds go directly to the issuing company. This is where capital formation occurs.

Keywords and glossary related to the primary market

We have now fully understood what primary market is. Let's now look at some related terms within the primary market.

  • Offer Document This document contains all relevant information about the company. This information includes the company's promoters, current projects, financial situation, and the goal of raising money. It is used to invite subscriptions.
  • Price BandThis is the price range at which an investor can offer securities.
  • Cut off price: The price at which securities will be offered.
  • Floor Price: The minimum price at which bids are accepted for an IPO.
  • Face Value:This is the minimum price below which stocks will not fall.

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