Primary market can be defined as the part of capital market where the issuance of new securities is done. The securities are offered to public and are sold for the first time. Also, sellers and buyers can negotiate without any intermediary. This market is also known as new issues market.
Generally, governments and companies obtain financing through securities whether they are debt based or equity based. This market normally features long term equity capital. Companies and government bodies buy these securities from investment banks and also from security dealers. When the primary issue is done the securities are issued directly by the company to the investors. The companies which receive the primary issues use them for setting up new businesses and also modernizing or expanding the current business. Primary market plays an important role in the economy by facilitating capital formation to the economy. If the initial sale is complete and further trading of securities is done in a market, the market will be known as secondary market. In primary market when securities are issued companies contact different underwriting firms to determine financial and legal aspects of the public offering. Securities are directly purchased from the user.
In primary market the funds collected through the sale of securities is done directly through the investors while in secondary market the money earned through sale of security does not go to the company but to the investor who sells the security. The secondary needs to be more liquid and transparent in nature. Sometimes in case of new stock issue called initial public offering dealers earn commission that is already included in the of the security being offered. In primary markets normally volatility gets increased compared to secondary markets because it is difficult to gauge investors’ demand. Unlike primary markets, bulk trading of securities takes place in secondary markets.
Hence, this concludes the definition of Primary Market along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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