Functions of Primary Market
A primary market performs three main functions: offering, underwriting, and distribution.
1. Offering New Issue: The primary market is also termed as a New Issue Market (NIM) as new issues are being offered and released in the market for the very first time. Here, investors invest in brand-new issues that have not been introduced previously on any other platform. A detailed assessment of the viability of the project is conducted while offering a new issue. Therefore, the market and investors look into the debt-equity ratio, liquidity ratio, promoters’ equity, and other factors before considering the corporation’s issue.
2. Providing Underwriting Services: One of the essential functions while offering a new issue is underwriting. In a primary market, an underwriter acts as the intermediator between the investor and the issuer. The Underwriter also purchases the remaining shares from the market if the required number of shares are not sold in the market. They earn a commission for their job if the shares are sold in the market. The role of an underwriter can be played by a financial institution or an individual. They are relied upon by investors to assess whether taking on a risk will reap worthwhile profits. An underwriter may purchase the entire IPO issue and then trade it among the investors.
3. Distribution of the New Issues: In the primary marketplace, new issues are distributed via a new prospectus issue. In other words, new issues are offered to the investors, and enter the loop of trading. The company’s details, issues, and underwriter-related information are passed on to the public for purchasing the new issue. As the trading further occurs, those new stocks and bonds leave the primary market and enter the secondary market.