How does the Primary Market Work?
1. The primary market works under the transactions system and for this process, three parties are involved: corporations or issuers, investors, and an underwriter.
2. A Corporation or Enterprise issues its stocks into the primary market as an IPO (initial public offering). The selling price of these new issues is set by a designated underwriter (not necessarily it be a financial institution). The new public offering is facilitated and observed by the underwriter. The underwriter or the investment banks who determine the securities’ initial price are given a commission by the issuer for the sale and the remaining amount is taken by the issuer.
3. Corporations or Government Entities issue new common and preferred stock, corporate and government bonds, notes, and bills on the primary market. They do so to expand their business operations or increase corporate capital. The corporations issue both debt and equity securities such as debentures and shares. On the other hand, the government issues treasury bills which are debt securities. These securities are released either at a face value, discounted value, or at a premium rate which transforms into debt and equity instruments.
4. These securities are issued in both international and domestic markets. In the primary market, investors purchase these newly issued stocks and bonds with a view of generating returns in the future by their investment. This form of market is under the regulation of the SEBI (Securities and Exchange Board of India). The primary market comes under the ambit of the capital market.