A primary market is one in which new securities are offered to the investing public for the first time. Hence, it is also called new issue market.
Advantages of primary market or the New issue market
1. It provides opportunity for new investors to start new enterprises: Persons with technical know-how may resort to promote new ventures which are profit-oriented. The new issue market gives them an opportunity to materialize their ideas.
2. Existing companies will be in a position to expand their activities: When the existing companies find their products obsolete, they would like to venture into new areas of production for which they require additional capital. The new issue market helps them raise the required funds.
3. Promotion of partnership firm into Public Limited companies or merger of companies or facilitates buy-back of shares: When new ventures are started, a management may wish to have a control on the ownership and for this purpose, they would like to enter into a buy-back arrangement. By this arrangement, the shares will be issued to a group of persons (NRIs) for a specific period after which they will be bought back from out of the profits. This ensures the retention of ownership and prevents any change in management.
Classification of securities in Primary Market
Securities dealt in the new issue market or primary market are classified as
- Equity Shares.
- Preference Shares.
1. Equity shares: These are shares issued by companies for raising capital. The owners of these shares are shareholders. Normally, the face value of the shares may be Rs.10 or Rs.100. A group of fully paid shares are called stock and these can be transferred. The shareholders are entitled for profit, which are distributed to them in the form of dividend. The share capital will be refunded to them only during the winding up of the company, provided the company has sufficient assets.
2. Preference shares: Preference shares are similar to equity shares but are given on a preference basis to certain shareholders like promoters, auditors, etc. There are cumulative, non-cumulative, participating, redeemable, irredeemable, convertible and non-convertible preference shares. Preference shareholders will get the first preference in the distribution of dividend over equity shareholders. The same condition applies in the repayment of capital at the time of winding up.
3. Debentures: It is a loan obtained by the company from the public for a fixed interest rate for a fixed period. Those investors who do not want to take any risks will prefer debentures as they have less risk on the repayment compared to shares. There are debentures which have mortgage charge on the assets of the company and these debenture holders are assured of the repayment.