Home/Blogs/What Is the Primary Market and How Does It Work

What Is the Primary Market and How Does It Work

17 Jul 2023

When the word “market” is used, it is often used in a “catch-all” way to refer to any markets, both primary and secondary. Stressing on the primary market, what is the primary market, you may well wonder. The primary market and the secondary market are distinct from each other, and here, the focus is on the primary market. Finding out more about the primary market is valuable to you if you wish to begin investing in any market. 

What is the Primary Market? 

Are you going to open a demat account anytime soon? If you are, this means you wish to invest in the market of securities, possibly the stock market. To know how the primary market works, and in order to have some clarity on its definition, you should know how it compares with the secondary market. Simply put, the primary market is the market which creates securities, while the secondary market is where securities are transacted/traded between traders and investors. You could say that the primary market acts as the source where new securities come from. 

Grasping How the Primary Market Works

Do you have the answer to the question, “What is the primary market?” Perhaps the concept will become clearer when you know how it actually works. For example, you may have heard of an IPO and even considered subscribing to any upcoming IPO. Well, in case you have come across the term, the primary market concept will be easy to grasp. 

When a private company wishes to issue shares of its company to the general public, “go public”, in other words, it does so through the primary market. This may occur when a small company wishes to expand and grow. Even a corporation that wishes to issue more company shares may do so through the primary market. When a private company wishes to issue its shares to the general public, and consequently gets listed on an exchange for public trading, it has to launch an initial public offering, or an IPO. The whole process of issuing shares is done via the channel of the primary market. So, the primary market has many entities that are employed for the issuance of new shares of a company, including underwriters, bankers, registrars, merchant bankers, etc. 

The Role of the Primary Market

It is within the primary market that companies “float” (in financial lingo) or sell new bonds and stocks to the public for the very first time. The primary market is facilitated by underwriters consisting of investment banks. They are responsible for setting an initial price range for any given security. They also oversee the sale of a security to an investor. Once this initial-level sale is completed, any further transactions and trading are conducted on the secondary market, into which a chunk of exchange-related trading takes place on a daily basis.  What securities are issued through a primary market? A primary market does not directly serve up stocks for sale to investors, but issues IPOs, rights issues, any private placement, or preferred allotments. So a primary market is different from a stock exchange which is essentially a secondary market. The question of “What is the primary market?” should be clearer to you by now, arming you with knowledge in your investment journey ahead. 

A Primary Market For Most Assets

So, if you open a Demat account to invest in the stock market, you can directly purchase stocks from an exchange (secondary market). On the other hand, to purchase an upcoming IPO stock, you must be linked with the primary market, going through an application (subscription) process to get shares allotted to you. A primary market could be referred to as a figurative place in which securities make their debut. Primary markets exist for many kinds of assets, but bonds and equities are the most common.

 

Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C
Click here to see your activities