WORKSHEET-25 BUSINESS STUDIES PART 2(CLASS 12)

 ROLE OF PRIMARY MARKETS IN INDIA

The key function of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments. It facilitates companies to issue new stocks to raise money directly from households for business expansion or to meet financial obligations. It provides a channel for the government to raise funds from the public to finance public sector projects. Unlike the secondary market, such as the stock market which trades listed shares between buyers and sellers, the primary market exists for the issuance of new securities by corporations and the government directly to investors.

IPOs and the Role of New Issue Markets

Companies raise funds in the primary market by issuing initial public offerings (IPOs). These stock offerings authorize a share of ownership in the company to the extent of the stock value. Companies can issue IPOs at par (market value) or above par (a premium), depending on past performance and future prospectus.

In a booming economy, a greater number of corporations float IPOs since more investors have surplus funds for investment purposes. Thus, the number of IPOs issued is indicative of the health of the economy. Invariably, smaller companies seeking funds for business expansion are the ones typically that float IPOs. But large, well-established firms also become publicly traded companies to gain visibility and to expand. Companies can raise an additional round of funding in the primary market by floating a secondary public offering.

Role of New Issue Markets in Global Investments

The primary market enables business expansion and growth for domestic and foreign companies. International firms issue new stocks--American Depository Receipts (ADRs)--to investors in the U.S., which are listed in American stock exchanges. By investing in ADRs, which are dollar-denominated, you can diversify the risk associated with putting all your savings in just one geographical market.

Sale of Government Securities

The government directly issues securities to the public via the primary market to fund public works projects such as the construction of roads, building schools etc. These securities are offered in the form of short-term bills, notes that mature in two to seven years, longer-term bonds and treasury inflation-protected securities (TIPS) linked to the Consumer Price Index. Government-issued U.S. Treasury bonds are free of credit risk. Visit the U.S. Treasury's Treasury direct website for information about these investments.

Primary Market Participants

An investment bank sets the offer price of the corporate security as opposed to market forces, which determines the price in the secondary market. While brokerage firms and online licensed dealers sell IPOs to the public, you may not be allotted IPO shares because of the large demand for a small number of shares typically issued by the company. Moreover, institutional investors (large mutual funds and banks) usually get the lion's share of much anticipated IPOs.

Market Risk

The securities and exchange commission cautions investors that IPOs are inherently risky and therefore unsuited for low network individuals who typically are risk-averse. This should be noted as something to be cautious about for two reasons. As an investor, of course, you'll want to weigh the risk with the potential earnings. If your small corporation is considering going public, you'll need a sufficient budget to plan and market your IPO to ensure it gets some traction from investors – in addition to all of the other costs inherent to an IPO.