What is the primary market? Definition and meaning
The Primary Market, also known as a New Issue Market, is where new securities are issued – it is part of the capital market. Corporations, national and local governments, and other public sector institutions can get financing through the sale of new stock or bond issues through the primary market.
Put simply, the primary market creates new securities and offers them for sale to the public.
All companies require capital for their operations. This capital (money) can be in the form of equity or debt. Equity is the stock capital (share capital) of a company. Debt consists of all the loans taken by the business.
XYZ Inc. sells shares to Investor A in the primary market. Investor A sells XYZ shares to Investor B in the secondary market.
In order to raise capital in the form of equity, a company can sell its shares to members of the public. When shares are sold directly to the public, this is done via the primary market route.
The sale of securities in the primary market is usually done through an investment bank or finance syndicate of securities dealers.
According to ft.com/lexicon, the primary market is:
“The market where new securities are issued and sold directly by the issuer to investors. Any trading after that takes place on the secondary market.”
The primary market and secondary market
In an initial public offering (IPO) and follow-on public offering (FPO), shares are sold in the primary market.
The money earned from the sale of securities in a primary market goes directly to the issuing company.
The primary market is vital for both the capital market and the economy as a whole – it is where capital formation takes place.
The buying and selling of existing shares and bonds (not new securities) occur in the secondary market through a stock exchange, bond market or derivatives exchange.
In the secondary market, the money goes to the investor who is selling the security, and not the company or entity that first issued the security.
In business, the term ‘primary market’ may also refer to a company’s main market, or a country’s main export market. For example, the primary market of corn is human and animal food consumption – its secondary market is ethanol. Most of Mexico’s exports go to the United States – its primary market is the US.
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