|Methods and techniques|
Primary market is a subset of financial market, where surplus funds are invested in new companies. It usually involves first sale of newly issued securities by authorized operators (so called initial public offering - IPO).
Factors influencing decision to invest on primary market
One of the factors influencing the possibility of investing in this market is the tendency to save money. The larger the investors' conviction that the placement of their funds on the primary market is better than in the bank, the more likely it is that this investment will take place. For businesses, selling their issued securities on the primary market represents an opportunity to obtain funds to finance its activities. In effect, the primary market offers opportunities of supplying funds to a business. The players in this market can be both corporations and individuals with a surplus of funds, who are interested in the purchase of issued securities.
To examine the profitability of a proposed issuance of securities on the primary market, it is recommended that the enterprise should firs obtain information about:
- possibility of obtaining a bank loan, and possibly also its cost,
- possible emission price (which may be fixed or variable),
- possible returns from such an emission,
- cost of a given emission.
The types of emissions on the primary market
On the primary market there are two types of securities issuances: public issue and private placement. Public issue of securities is the one in which the offer of acquisition of securities being issued is made through the media. The offer for purchase, however, is addressed to an indefinite number of investors, or at least to more than 300 people. The securities placed on the market must be in a de-materialized form, and the emissions can be made repeatedly by the same issuers. To be able to make its securities publicly traded, the operator must obtain the approval of the Securities and Exchange Commission. The exceptions are the securities issued by the Treasury and the Polish National Bank. Securities, which may be admitted to trading on a public market are shares, bonds, marketable securities law and derivative rights.
In the case of private placement, the offer is addressed to fewer than 300 persons, turnover is of a private character, can take place with the participation of state, or only between private individuals. There is also no need of obtaining the permission of the Securities and Exchange Commission for the issuance of securities in the form of a private placement.
The functions of the primary market
- allocation of capital in the most attractive and efficient sectors of the economy,
- development opportunities for businesses,
- increasing competition in the financial market,
- development of the securities market (new issues, new investors);
- improved valuation of the issuer on the primary market;
- Fabozzi, F. J., Modigliani, F., Jones, F. J., & Ferri, M. G. (2002). Foundations of financial markets and institutions.
- Fabozzi, F. J., & Modigliani, F. (2003). Capital markets: institutions and instruments. Pearson College Division.
- Loughran, T., Ritter, J. R., & Rydqvist, K. (1994). Initial public offerings: International insights]. Pacific-Basin Finance Journal, 2(2), 165-199.
- Silber, W. L. (1983). The process of financial innovation. The American Economic Review, 73(2), 89-95.
Author: Anastazja Samarska