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Wednesday, 14 September 2016

Primary Market

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What is primary market?
Ans: A primary market issues new securities on an exchange for companies, governments and other groups to obtain financing through debt-based or equity-based securities. Primary market are facilitated by underwriting groups consisting of investment banks that set a beginning price range for a given security and oversee its sale to investors. Once the initial sale is complete, further trading is conducted on the secondary market, where the bulk of exchange trading occurs each day.
  
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                                                                                                                  Companies and government entities sell new issues of common and preferred stock, corporate bonds, and government bonds, notes, and bills on the primary market to fund business improvements or expand operations. Although an investment bank may set the securities initial price and receive a fee for facilitating sales, most of the funding goes to the issuer. Investors pay less for securities on the primary market than on the secondary market.

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The primary market is the part of the capital market that deals with issuing of new securities. Companies, governments or public sector institutions can obtain funds through the sale of a new stock or bond issues through primary market. This is typically done through an investment bank or finance syndicate of securities dealers.
     
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                                       The process of selling new issues to investors is called underwriting in the case of a new initial public offering(IPO). Dealers earn a commission that is built into the price of the security offering , though it can be found in the prospectus. Primary market create long term instruments through which corporate entities borrow from capital market.
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The primary market is also known as new issues market. Here, the transaction is conducted between the issuer and the buyer. In short, the primary market creates new securities and offers them to the public.
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   For instance, initial public offering(IPO) is an offering of the primary market where a private company decides to sell stocks to the public for the first time. An important point to remember here is that in the primary market, securities are directly purchased from the issuer.
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Features of primary markets are Followings:-
(I).  This is the market of new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore, it is also called the new issue market(NIM).
(II). In a primary issue, the securities are issued by the company directly to investors.
(III). The company receives the money and issues new security certificate to the investors.
(IV). Primary issue are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
(V). The primary market performs the crucial function of facilitating capital formation in the economy.
(VI). The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital, this is known as "going public".
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