Primary Market: Secrets and It’s working you must know

• 15 April 2020 | 1554 Views | By Mint2Save

In this article, we shall explore about Primary market, an efficient tool via which several companies and startups can raise money.

All companies are needing capital to run their business. This capital can be in the form of equity or debt. Here equity refers to all the money of a company through stock, whereas debts refer to loans taken by the company.

So, the capital market refers to the place where the trade of various financial instruments take place. 

What are the two types of Capital Market?

Capital Market is generally of two types-

• Primary Market and 
• The Secondary Market.    

What is the meaning of Primary Market?

The primary market, which is also known as the new issue market, is a market where new securities are sold and purchased for the first time.

What are the features of Primary Market?

This market only deals with the new securities and its main objective is to formulate capital for the national and local government, public institutions through initial public offering and follow-on public offering.

What is IPO?

An initial public offering refers to the process of offering stocks of a private company directly to the general public. After issuing securities to the public, the Company becomes a publicly listed company on the stock exchange of India, and thus an IPO is also known as “going public”.

Under this, either the Company can issue new shares for raising equity capital, or the existing stakeholders have the right to sell their shares to the public. Any company can go pubic irrespective of being old or new which is listed in the stock exchange of India. 

Process of Issuing IPO-

To go public, a company must follow the following steps-

Selection of an Investment Bank

 Further, prior to going public, the issuing company must select an investment bank which will give them advice while issuing IPO and will provide them with the underwriting service. Underwriting is a process under which a financial institution takes the risk of going public for a certain fee. He acts as a broker and maintains the link between the issuing company and the public. An investment bank should be selected keeping in mind the following points-

• The reputation of the bank.
• The relation between the company and bank.
• Industry expertise.
• Know if the investment bank can issue securities to more investors or not.

Regulatory Filings and registration with SEC

After selection of the investment bank, both the Company and the underwriters will file the registration statement with the SEC. The registration statement should clearly state the financial data and the plans of the Company regarding the utilization of fund raised through IPO. 

If SEC feels that the Company has disclosed all the essential information which a public investor must know, then only it gets a green signal, or it is sent back along with the comments on which they are supposed to work

Deciding of price

Once the SEC approves the IPO, another critical task is of determining the offer price. Offer price refers to the rate at which the Company issues its shares to raise the capital. Offering price is affected by the following factors-

•  The goals of the company
• Conditions of the market

Also, under this, the number of shares to be sold are decided. An IPO can be underpriced as well to ensure full or oversubscription. 

The issue to the Public and Stabilization

On a particular date as planned by the Company and underwriters, the prospectus and application forms are made available to the public. They are issued both online and offline. The public can get the form from any investment banks and fill it and submit with a cheque. 

As per SEBI guidelines, an IPO is available to the general public for a period of 5 working days. Also, after issuing shares to the public stabilization activities are carried out by the underwrites but only for a short period.  

Transition

It is the final stage of the process of IPO. It starts after 25 days of issue to the public in which the underwriter provides an estimation about the earning of the Company and thus act as an advisor and evaluator after issuing of shares.  

What is the Offer for Sale?

In case a company needs some additional capital to meet its goals and objectives, then the Company can go for the offer for sale. SEBI first introduced it in 2012. Under this, the promoters of the private Company sell their shares to the public. By selling their shares, they reduce their holdings. In this, an already stakeholder is diluting its stake through the primary market.

Rules of an OFS-

• Offer for sale is only available to the top 200 companies of the share market based on their market capitalization ranking.
• The Company undergoing OFS needs to inform the stock exchange at least two days before the OFS
• non-promoter shareholders having more than 10% share capital can also offer their shares through OFS.    
• At least 25% of the shares being offered as an offer for sale need to be reserved for mutual fund and the insurance company.

Merits of investing in OFS-

• Discount is offered.
• Minimum Paperwork is there.
• Cost-effective.

Demerits-

• For retail investors, there is a limited reservation.
• Bidding window is also limited to a certain level.

So, we can say that the primary market is a market in which new securities are directly issued and sold by the issuer to the investor. Any trading that takes place after this will take place in the secondary market.

What is the meaning of Primary and Secondary market?

Is investing in Primary Market Risky?

Often a lot of risks are involved while investing in the stock of any company. These investments 

are subject to market risk. It means that there is always a risk of our stock losing its value due to any change in the economic event affecting the market.   

Investing in the Primary market can also sometimes be risky. This is because these companies are either new or young while undergoing an IPO and how their business will operate is unpredictable. Due to the following reasons investing in the primary market through IPO gets risky-

2. No history of trading–

A company issuing an IPO has no trading history because it is through an IPO that they are for the first time raising their capital by issuing their shares to the general public.

Due to this reason investing in the primary market gets risky as it becomes difficult to predict the movement in stock’s price.

No experience of handling large projects–

By issuing shares and stock to the general public, although the Company can collect a large sum of money it is sometimes unable to use this money productively because they lack the experience of handling large projects. As a result of the same, the business gets exposed to market risk.

Conclusion-

So, through this article, we came to know what the primary market is and how it is working. If any person is planning to invest in the stocks, then do consider the primary market as well because this market often gets risky, but it does offer a high return to its investors. Being an investor buying shares through an OFS is also quite easy as it involves less paperwork, and you also get a discount on the face value of the stock.

When investing in any company through IPO or OFS, the investor needs to know about it thoroughly as it will help them to earn a better return and won’t dissuade them from investing in an IPO.