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:''"Primary market" may also refer to a market in art valuation.''
The primary market is the part of the capital market that deals with the issuance and sale of
/ref> "A market is primary if the proceeds of sales go to the issuer of the securities sold." Buyers buy securities that were not previously traded.
In a primary market, companies, governments, or public sector institutions can raise funds through bond issues, and corporations can raise capital through the sale of new stock through an
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
to purchasers directly by the issuer
Issuer is a legal entity that develops, registers, and sells securities for the purpose of financing its operations.
Issuers may be governments, corporations, or investment trusts. Issuers are legally responsible for the obligations of the issu ...
, with the issuer being paid the proceeds. A primary market means the market for new issues of securities, as distinguished from the secondary market, where previously issued securities are bought and sold."Section 7.03.120 - Definitions; Primary Market"/ref> "A market is primary if the proceeds of sales go to the issuer of the securities sold." Buyers buy securities that were not previously traded.
Concept
In a primary market, companies, governments, or public sector institutions can raise funds through bond issues, and corporations can raise capital through the sale of new stock through an initial public offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investme ...
(IPO). This is often done through an investment bank
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
or underwriter
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...
or finance syndicate of securities dealers. The process of selling new shares to buyers is called underwriting
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabili ...
. Dealers earn a commission that is commonly built into the price of the security offering, though it can be found in the prospectus.
IPOs are not the only way new securities are issued. Publicly traded companies can issue new shares in what is called a ''primary issue'' of debt or stock, which involves the issue by a corporation of its own debt or new stock directly to buyers like pension funds
A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income.
Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...
, or to private investors and shareholders.''Fundamentals of Corporate Finance'', McGraw Hill, 2001
Since the securities are issued directly by the company to its buyers, the company receives the money and issues new security certificates to the buyers. The primary market plays the crucial function of facilitating capital formation within the economy. The securities issued at the primary market can be issued in ''face value'', ''premium value,'' or ''at par value
Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value).
Bonds
A bond selling at par is priced at 100% of face valu ...
.''
Primary markets create long-term instruments through which corporate entities raise funds from the capital market. It is also known as the New Issue Market (NIM).
Once issued, the securities typically trade thereafter on a secondary market such as a stock exchange, bond market
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
, or derivatives exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or f ...
.
Raising funds
Corporate entities raise funds from the primary market in three ways: # Public issue - a stock exchange lists the securities, and the corporation raises funds through initial public offering (IPO). # Rights issue - existing shareholders are offered more shares at a discounted price and on a ''pro rata'' basis. # Preferential allotment - a corporation issues shares at a price which may or may not be related to the current market price of the same security.See also
* Secondary market * Third market * Fourth marketReferences
Financial markets {{Econ-stub