It is said that capital markets are the mirror of the economy implying that whenever anything is wrong or right with the economy chances are that capital markets will be first to react negatively or positively. The primary market is one of the pillars of the capital markets without which capital markets will not be able to operate efficiently, primary markets refer to those markets where companies both government, as well as private companies, issue new securities to the public through an initial public offering. In order to understand more about primary markets, one should look at various important features of the primary market –
Primary Market Features
Raising of Capital
The first and foremost feature of the primary market is that companies use this market for raising of fresh capital which may be used by the company for repayment of debt or for expansion of the business or for restructuring purpose and so on. In simple words, primary markets are used by the companies for raising of fresh capital from the general public so as to meet capital requirements by issuing them shares of the company.
Direct Dealing with Investors
In case of primary markets companies deal directly with investors as they offer shares to the public directly through an initial public offering, unlike secondary markets where the company has no role to play as investors and traders trade shares of the company among themselves. In simple words, in case of primary markets, there are no intermediaries as company offer shares and investors have an option either to subscribe to the initial public offer of the company or avoid the initial public offer of the company.
Active during Bull Markets
Another characteristic of this market is that it is most active during bull markets because when stock markets are weak nobody wants to invest money into stock market and companies refrain from bringing initial public offering of their stock as it will not have good response from general public, conversely in case of bull markets when investor sentiments are at peak companies use this opportunity and bring their initial public offering so that their offering get good response and they can raise capital at good price.
Less Volatility
In the case of secondary markets there is plenty of volatility as secondary markets fluctuates daily depending on the global as well as domestic factors but as far as primary markets are concerned they are not affected that much by these factors as companies issue initial public offering only once in a while which is not the case with secondary markets where shares of various companies are traded daily resulting in more volatility in secondary markets.
Regulatory Requirements
Once the company decides to get their stock listed through primary market than they have to follow strict regulatory requirements of the stock exchanges in which the company is planning to list its shares. In simple words, in the case of primary markets, legal and regulatory requirements are strict which ensure that only quality companies approach stock exchanges for the issue of shares to the public.
As one can see from the above characteristics of primary markets that primary markets are very important part of capital markets and that is the reason why government and stock exchanges ensure that it has all the system in place to have a smooth and efficient running primary market.