Benefits and Limitations of Primary Market

02/07/2022 0 By indiafreenotes

When a company publicly sells new stocks and bonds for the first time, it does so in the primary capital market. This market is also called the new issues market. In many cases, the new issue takes the form of an initial public offering (IPO). When investors purchase securities on the primary capital market, the company that offers the securities hires an underwriting firm to review it and create a prospectus outlining the price and other details of the securities to be issued.

All issues on the primary market are subject to strict regulation. Companies must file statements with the Securities and Exchange Commission (SEC) and other securities agencies and must wait before their filings are approved before they can go public.

Companies that issue securities through the primary capital market may hire investment bankers to obtain commitments from large institutional investors to purchase the securities when first offered. Small investors are often unable to purchase securities at this point because the company and its investment bankers want to sell all of the available securities in a short period of time to meet the required volume, and they must focus on marketing the sale to large investors who can buy more securities at once. Marketing the sale to investors can often include a road show or dog and pony show, in which investment bankers and the company’s leadership travel to meet with potential investors and convince them of the value of the security being issued.

Prices are often volatile in the primary market because demand is often hard to predict when a security is first issued. That’s why a lot of IPOs are set at low prices.

A company can raise more equity in the primary market after entering the secondary market through a rights offering. The company will offer prorated rights based on share investors already own. Another option is a private placement, where a company may sell directly to a large investor such as a hedge fund or a bank. In this case, the shares are not made public.

Benefits / Advantages of Primary Market

  1. Mobilization of Saving: Primary market helps in mobilising surplus savings of individuals and others to investment.
  2. Channelizing Savings for Productive Use: The funds raised in the primary market are mainly used for expansion, diversification and modernisation purposes of the corporate.
  3. Source of Large Supply of Funds: The new issue market is a market for raising long term capital funds from investors who are spread across the country. Thus, large amount of funds can be raised for a longer period.
  4. Rapid Industrial Growth: Investment of the surplus saving by the corporate in industrial sector led to increase in production and productivity in the economy.

Disadvantages of Primary Market

Primary market operating in the country is not free from any defects and some of the important defects of the primary market in India are given below.

  1. Possibility of Deceiving Investors: The corporate raising money through public issue may not disclose detailed information in the prospectus, in order to deceive investors.
  2. No Fixed Norms for Project Appraisal: The projects for which money is raised are to be evaluated in terms of financial, economic, profitability and market feasibility by the project manager. As there are no fixed norms for the appraisal of a project, the evaluation is subject to the personal capability and judgement of the project.
  3. Ineffective Role of Merchant Bankers: The merchant bankers perform most of the pre-issue and post issue obligations with regarded to the new issue. But it has