A Primary Market
A primary market is where new securities are purchased. Companies, governments, and other organisations frequently resort to an exchange to get funding through debt- or equity-based instruments. Financing groups, which are made up of investment banks, promote primary markets by establishing an initial price range for a particular instrument and supervising its sale to investors.
The secondary market, where the majority of exchange trading takes place each day after the first sale is over, is where additional trading is done.
Acknowledging Primary Markets
Securities are generated in the primary market. Corporations first offer their new stocks and bonds to the general public on this market, or "float," as it is known in the financial industry.
To raise money for operational expansion or company upgrades, corporations and governmental bodies offer fresh issues of common and preferred stock, corporate and governmental bonds, notes, and bills on the open market. The majority of the proceeds from the sale go to the issuer, even if an investment bank may determine the securities' initial price and get compensation for arranging the sale.
On the primary market, there are tight regulations that apply to all concerns. Before offering their securities for sale to investors, companies must submit paperwork to the Securities and Exchange Commission (SEC) and other securities regulatory bodies for approval.
The primary market closes once the first offering is finished, meaning all of the stock shares or bonds have been sold. The secondary market subsequently begins to trade such securities.
Primary Market Issues: Types
As an illustration of a security offered in a primary market, consider an initial public offering, or IPO. An IPO happens when a private firm "goes public," or sells stock to the general public for the first time. A designated investment bank is engaged by the business to handle the initial underwriting for a certain stock, and it sets the procedure, including the initial price of the new shares.
For instance, corporation XYZ Inc. employs five underwriting companies to ascertain the IPO's financial specifics. The underwriters specify that the shares will be issued at a price of $10. Investors can then purchase the IPO from the issuing business at this price. This is the first chance that investors have to invest money in a company by purchasing its shares. The money made from the selling of shares on the primary market makes up a company's equity capital.
After stocks have already entered the secondary market, a rights offering (issue) enables businesses to obtain additional shares through the primary market. Payable rights are provided to current shareholders based on the number of shares they presently possess, and new investors may purchase freshly issued shares.
Both Primary Market and Private Placement
Other primary market stock offers include preferential allotments and private placements. Private placement enables businesses to sell directly to bigger investors like hedge funds and banks without disclosing their stock to the general public. Shares are offered to certain investors (often hedge funds, banks, and mutual funds) through preferential allocation at a discounted rate not accessible to the general public.
Similar to corporations, governments can decide to issue new short- and long-term bonds on the primary market in order to raise debt money. The interest rates at the time of issuance, which can be greater or lower than those given by existing bonds, are used to determine the coupon rates for newly issued bonds.
An Example of a Primary Market
The largest online firm IPO and the largest IPO in the technology sector in US history at the time was Facebook's (META) IPO in 2012. Expectations were high because of the company's attractiveness and swift success; many investors thought the stock's value would rise significantly faster on the secondary market. Due to strong primary market demand, underwriters increased the stock offering level by 25% to 421 million shares and priced the stock at $38 per share, which is the top of the planned $35-38 range. The value of the shares increased to $104 billion, which was the most of any new public business.
Despite raising $16 billion in the primary market, Meta's stock did not significantly rise in value on the day of the IPO; it finished at $38.23 with 460 million shares sold and a turnover rate of more than 100%. Later in 2012, Meta’s price really dropped dramatically, reaching a record low of $17.73 on September 4, 2012.
However, it bounced back as a result of the company's intense focus on its mobile platform.
At the company's IPO, if you had invested $10,000 (£8,240), you would have acquired 263 shares of Facebook common stock. At its peak in September 2021, shares were going for as high as $383 per share. Hence, back in September 2021, your investment would have been worth $100,000 (£82,400). As of today (February 9th, 2023), the shares are going for around $186 each, meaning your investment is still worth almost $50,000 (£41,200). In hindsight, the $38 per share main market buy appears like a sizable discount.
