What is a Primary Market

7/30/2019 What is a Primary Market

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What Is a Primary Market

Primary Market

Primary market is the market for newly issued financial assets. It is also known as the"issue market." There are different kinds of primary markets based on the nature of the

asset sold such as the primary bond market, the primary equity market or the primarymortgage market. In the equity market the most common form by which security isissued is through "initial public offering" (IPO). Underwriters play an important role indetermining the pricing of an IPO. Large institutional firms are the major players of theprimary market.

Existence of Primary Market

Capital Generation

Primary markets enable firms to raise capital through the sale of financial assets.

Businesses are able to access potential investors that are outside its immediateinfluence. Businesses have to meet stringent market standards to issue securities at theprimary market. The added scrutiny makes the issue more attractive to potentialinvestors, and the company is able to raise the capital with lower costs. The companycan also continue to raise more capital for future investments through multiple issuesbecause it is not restricted to a single set of investors.

Liquidity

Primary markets also help in making the financial assets more liquid. Investors inprivately held companies are tied to the fortunes of the company. The primary marketinvestors, on the other hand, are able to easily trade their investments in the secondarymarket. This liquidity makes investors less wary and enables companies to raise morecapital easily. Indirectly, this translates to more investment in businesses and better jobcreation.

Diversification

Risk reduction through diversification is another important part of the role that primarymarkets play in finance. An IPO has a large number of financial intermediaries investingin the IPO. Therefore, the risk of failed investment is shared, thereby reducing theoverall risk of an investing firm. On the other hand, the issuing firm is not dependent ona single investor but has access to multiple sources, so the risk of not finding an investoris also reduced. The institutional investors can also choose to invest in a portfolio ofmultiple IPOs, thereby reducing their risk through diversification.

Cost Reduction

Stringent market regulations ensure that to sell at the primary market businesses shouldmeet financial and legal parameters. Businesses should also provide full disclosure oftheir financial structure through a prospectus that is available to all potential investors.Due to this, investors can accurately estimate whether the IPO price is fair. The primarymarket thus reduces "information costs"


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The costs incurred in assessing the investment merit of the asset. The primary marketalso reduces "search costs"--the costs associated with time and money spent in locatingpotential investors and counterparty for trade.

Primary Market operation and conducting in pakistanPrimary Market Activities

If you are seeking to raise funds for your business, or to get in on the ground floor on a

hot new stock, the primary market is the place to do it. The term "primary market"

means that companies sell their stock or securities directly to interested investors.

Companies introduce their shares to the primary market through an initial profit offering.

Eventually, shares bought on the primary market will be bought and sold by others who

do not represent the company. Primary markets represent an important growth engine

for a country's economy.

Initial Profit Offering

o An initial profit offering (IPO) marks the first time a company sells its stocks orsecurities to investors directly. In the world of finance, the term "security" means that acompany or government agency sells the right to share in its profits. For example, ifCompany A sells its stock to Investor B through an IPO, Investor B now has a right to aportion of Company A's profits. Afterwards, Investor B can sell his share of the companyto another investor but not on the primary market.

An Information Exchange

o In addition to being a place where IPOs are sold, the primary market also acts as asource of information. If an investor seeks new opportunities, he will only find out aboutthem on the primary market. Even before a company launches an IPO, news of itspreparation circulates throughout primary markets. Investors then have the chance todetermine whether a new company is a worthy investment or not.

o Primary Markets as Growth Engines

o Without investment from individuals or governments, a country's economy can notgrow. Such investment is known as capital in the world of finance. Primary markets

provide an opportunity for investors to help the economy grow by enabling them tosupport new ventures. In turn, these new ventures can provide employment as well asprofit. Stock holders can use their profits to invest in more new enterprises. Throughinvestment on the primary market, the economy can grow healthy and robust.


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Effectiveness of the Primary Market

The primary market refers to the market of companies, governments and other

organizations that issue new securities. The primary market consists of investment

banks overseeing the sale of these securities.

Purpose

The purpose of the primary market is for companies to sell securities to raise cash fortheir companies. Selling securities is an effective way of raising cash. The primarymarket is the place where investors look to purchase new securities.

Benefits

The primary market offers benefits for both investors and companies selling securities.

Investors often earn profits through purchasing these securities when they are firstreleased. Companies benefit through the effectiveness the primary market offers.Investors often look at this market when choosing where to invest their money.

ProcessUnderwriters, working for investment banks, determine initial prices of these securities.Investors then have the option of purchasing them. After trading in the primary marketstarts to slow down, the securities are then moved to the secondary market, whereanyone can purchase or sell the securities. The primary market offers effectiveness forthe sale of new securities because investors are always looking for new types ofinvestments to purchase.

Primary Market operation

Sale of securities through auction in the first place.

Sale of Securities on Syndication/Underwriting/Tap Sales/Private Placements as andwhere required.

A time table with less frequent auctions and reason able volume for each auction.

Announcement of Government borrowing requirements and borrowing calendar.

Dissemination of auction data.

Distribution through Primary Dealer system.


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Example of Primary Market operation in pakistan

The State Bank of Pakistan is the central bank of the country. The State Bank of Pakistan

performed all the traditional and non-traditional functions. The traditional functions, which are

generally performed by central banks all over the world, are classified into two groups;

Primary Functions and secondary functions.

1 Primary Functions

including issue of notes, regulation of the financial system, lender of the last resort, and

conduct of monetary policy,

1.1 Sole Authority to Issue Notes

One of the primary responsibilities of the State Bank is the regulation of currency in accordance

with the requirements of business and the general public. For this purpose the Bank has beengranted the sole right of issuing notes in the country under Section 24 of the State Bank of

Pakistan Act, 1956. The overall affairs with respect to the issuing of notes are conducted

through two notionally separate departments of SBP, viz., Issue Department which deals with

the issue of notes, and the Banking Department which undertakes general banking business.

There are four issue departments one each in four provincial capitals viz., Karachi, Lahore,

Peshawar and Quetta. Under section 30 of the State Bank Act, 1956 the assets of the Issue

Department should at no time fall short of its liabilities, i.e., total notes issued.

Documents

What is a Primary Market