Economics
Primary Market
The primary market refers to the financial market where new securities are issued and sold for the first time. It is where companies raise capital by offering their stocks or bonds to investors. In this market, the securities are purchased directly from the issuing company, and the proceeds from the sales go to the company issuing the securities.
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8 Key excerpts on "Primary Market"
eBook - PDFCommercial and Investment Banking and the International Credit and Capital Markets
A Guide to the Global Finance Industry and its Governance
- B. Scott-Quinn(Author)
- 2020(Publication Date)
- Palgrave Macmillan(Publisher)
Secondary security markets are covered in detail in Chapter 12. Primary Markets provide a range of financing much wider than simply equity finance (initial public offerings), which is the example often chosen when discussing new financing. Thus financing in the modern economy can provide all of the following: a means for households to obtain the use of residential housing services through long-term mortgage finance (bank loan) as an alternative to rental of housing services; a means for households to smooth out the normal daily or monthly variability of cash inflows and outflows through the provision of short-term loans, such as those to finance the purchase of a new car, and stand-by liquidity, such as overdrafts and credit card facilities, which become available on demand; a means for companies to smooth out the daily difference between cash inflow and outflow (resulting from the time lag between buying raw materials to make goods and receiving cash from sales) through stand-by facilities such as an overdraft and lines of credit; initial public offering services for private companies wishing to raise funds from the public; finance for expansion for growing companies (debt and follow-on equity issues); leveraged financing for private equity funds which are arranging the buy-out of a company; financing for new companies at the innovation end of financing through venture capital; a means for governments to bring spending forward from the future (and thus from future tax payers) to the present time through public borrowing, also known as sovereign borrowing. MATURITY OF FUNDING: BORROWER LIQUIDITY Whereas financial investor liquidity (bank provided and secondary market liquidity) is about the ability of a lender to turn his or her investment back into 90 Primary MarketS cash with immediacy, borrower liquidity is the reverse of that, i.e. it is the freedom not to have to return that liquidity to the investor (or the bank) for a long period of time.
- Robert Parrino, Hue Hwa Au Yong, Nigel Morkel-Kingsbury, Jennifer James, Paul Mazzola, James Murray, Lee Smales, Xiaoting Wei(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
The underwriter will be left with 10 000 bonds. BEFORE YOU GO ON 1. Why would a company attempt to sell its securities privately, like in the example of Scentre Group previously discussed? 2. Why might a company prefer to have a security issue underwritten by an investment bank? 2.3 Types of fnancial markets LEARNING OBJECTIVE 2.3 Describe the primary, secondary and money markets and explain why these markets are so important to businesses. We have seen that both direct and indirect flows of funds occur in financial markets. However, as already mentioned, financial market is a broad concept covering all forms of markets that deal with short-term and long-term funds. A money market focuses on short-term funds (with maturity of less than 1 year), while a capital market focuses on long-term funds (with maturity greater than 1 year). The same institution may be involved in both the money market and the capital market. Next, we examine some widely used financial market classifications. Note that these classifications often overlap. Primary and secondary markets A Primary Market is any market where companies initially sell new security issues (debt or equity). Suppose Wesfarmers needs to raise $100 million for a business expansion and decides to raise the money through the sale of ordinary shares. The company will sell the new equity issue (ordinary shares) in the Primary Market for shares — probably with the help of an underwriter, as discussed earlier. Pdf_Folio:30 30 PART 1 Introduction and foundations When such issues are open to the public for the first time, they are called an initial public offering (IPO). The Primary Market may also be a wholesale market where sales take place outside of the public view. A secondary market is any market where already issued securities may be bought and sold.
eBook - ePub- R. Tee Williams(Author)
- 2011(Publication Date)
- Academic Press(Publisher)
Part 2
Markets and Marketplaces
Introduction 1. The Primary Market 2. Secondary Markets
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Introduction
We use the term “markets” to refer to the creation and trading of securities and other traded instruments. Marketplaces are the venues where instruments that have been created and issued to the public are exchanged between buyer and seller. We can categorize markets in several different ways, but there are two basic distinctions among markets for traded instruments (see Figure 2 ). The Primary Market is the place where securities are created. The secondary market is the place where investors and traders trade instruments after they are issued.Figure 2 Market categories create a means to distinguish the markets where securities are created from where they traded after they are issued.We sometimes use the term “marketplace” because, as we saw in the “History” section in Book 1, An Introduction to Trading in the Financial Markets: Market Basics , until relatively recently markets had to be conducted in a physical place. However, beginning in 1976 with the Toronto Stock Exchange, trading has become increasingly automated, and now much—maybe even most—trading occurs in a virtual marketplace. Passage contains an image
1
The Primary Market
The Primary Market is the place where securities are created. Unlike the secondary markets described in Chapter 2 , the Primary Markets raise money on behalf of companies or governments. Figure 2.1 shows the purpose of the Primary Market.Figure 2.1 The Primary Market provides a mechanism for investors and their intermediaries to funnel disposable income to companies and governments that employ those funds to generate economic growth, resulting in income and market appreciation for the investors.There are a number of different processes for raising capital in the Primary Market. We explore these processes in Part 4
eBook - PDF- Janette Rutterford, Marcus Davison(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
So companies and governments issuing new securities in the Primary Market are indeed supplying assets for the market to distribute to purchasers. But once a new marketable security has been sold to an initial investor, this is not the end but only the beginning of the story. A key feature of the stock market is that a security can continue to be bought and sold among market participants in a secondary market for as long as it has value, that is, for as long as it is expected to produce some future cash flows for the holder. So financial assets do not just pass through the market as if along a one-way street; they also circulate within it. In this respect the market for securities may appear to be similar to markets for second-hand or previously-owned goods such as cars, houses or antique furniture. But the big difference is that the value of a security, unlike that of a house or a car, is not affected by the fact that it has been previously owned per se , still less by how well it has been looked after, or even by how old it is. The value of a security depends exclusively on its expected future cash flows, so it is not a backward-looking but a forward-looking concept. The structure of the securities markets is further complicated by the fact that the companies and governments that supply new securities to the market are also active as buyers of other issuers’ new securities and as buyers and sellers of previously issued secu-rities. And as if all this were not enough, in many securities markets, and especially in those of the most advanced economies, it is possible for investors to sell securities they do not already own. All of this makes the job of organising, regulating and understand-ing the market rather more complex than in the case of a conventional market for goods or services.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as Primary Markets and secondary markets. In Primary Markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. Stock Market A stock market or equity market is a public (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion at the start of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values , cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together.
eBook - PDFCorporate Finance
Theory and Practice in Emerging Economies
- Sunil Mahajan(Author)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
4. The IPO is an important event by which a company raises funds from the public by issuing equity shares. 5. Secondary market enables trading of shares previously issued by the company through an IPO or otherwise and provides liquidity to investors. 6. Investors, speculators and arbitrageurs are the three participants who make the financial markets complete. Financial Markets | 47 CHAPTER QUESTIONS 1. What role do financial markets play in an economy? What is likely to happen to an economy that does not have an efficient financial market? 2. Who are the different participants in financial markets that make the markets complete? What would happen to the market if any of them were absent? 3. What do you understand by Primary Market? What role does it play in an economy? 4. What is an IPO? Why would a company go in for an IPO? What are the considerations before a company when it decides to have an IPO? 5. What do you understand by secondary market? Why is the secondary market essential? 6. What are the diverse features of debt and equity respectively? What impact do these differences have on the investors? 7. What is the role of arbitrage in financial markets? CASE FOR DISCUSSION Until the mid-1990s, investing in equities was a nightmarish experience. Each stage of the investment process was uncertain. The whole process was fraught with high risk. The investor could never feel assured if 1. the price paid by him was actually the price at which the shares were purchased by his broker in the stock market, 2. the shares would be delivered to him on the stated date, 3. the shares are genuine or what is technically termed as ‘good for delivery’, and 4. the investor would be able to transfer the shares in his own name. The cycle repeated itself on the sell side too when the investor would be uncertain of the sales price, the actual payment of the sales proceeds and the acceptance or non-acceptance of the shares delivered by him.
eBook - ePub- Jian Gao(Author)
- 2011(Publication Date)
- Wiley(Publisher)
PART TWO The Emergence of a Primary Market Passage contains an image
CHAPTER 3
Primary Market for Treasury Bond Transactions
Overview
In 1953, faced with severe economic challenges, the central government set in motion a series economic restoration programs. One of these programs was a plan to finance the budget shortfall by issuing state construction bonds. The central government continued to do so until 1958; then it stopped issuing treasury bonds for the next 23 years. It was not until the early 1980s that the treasury bond market began to develop in any meaningful way. Between 1981 and the end of 2005, China issued bonds worth a total of RMB5268.7 billion, of which RMB2387.64 billion have been redeemed, leaving RMB2981.09 billion outstanding.The description of bond market is intended to provide evidence in support of the institutional economic engineering (IEEN) framework. BOND MARKET REFORM TIMELINEPrior to 1991, as we have seen, treasury bonds were distributed through a combination of political mobilization and administrative allocation. Since 1991 onward, a new era of bond market reform has unfolded.1991 A pilot underwriting syndication was successfully carried out by financial intermediaries, signaling the emergence of a Primary Market for treasury bonds. This, in turn, provided the central bank with the means to adjust the national economy by means of financial instruments. 1993 The book-entry form of government bond was introduced on a trial basis. 1994 Treasury bond certificates targeted at individual investors were introduced. 1996 Government securities issued through market-oriented auction method rather than by the State Council; scripless bonds gradually replaced paper securities. 1998–2001 The State Council resumed its power to set the coupon rate of government securities. Treasury bonds were issued mainly to banks, and the issuance of market-oriented treasury bond gradually decreased. 
eBook - PDFCapital Market Instruments
Analysis and valuation
- M. Choudhry, D. Joannas, R. Pereira, R. Pienaar(Authors)
- 2004(Publication Date)
- Palgrave Macmillan(Publisher)
In this chapter we define cash market securities and place them in the context of corporate financing and capital structure; we then define derivative instruments, specifically financial derivatives. CAPITAL MARKET FINANCING In this section we briefly introduce the structure of the capital market, from the point of view of corporate financing. An entity can raise finance in a number of ways, and the flow of funds within an economy, and the factors that influence this flow, play an important part in the economic environment in which a firm operates. As in any market, pricing factors are driven by the laws of supply and demand, and price itself manifests itself in the cost of capital to a firm and the return expected by investors who supply that capital. Although we speak in terms of a corporate firm, many different entities raise finance in the capital markets. These include sovereign governments, supranational bodies such as the World Bank, local authorities and state governments, and public sector bodies or parastatals. However, equity capital funding tends to be the preserve of the firm. Financing instruments The key distinction in financing arrangements is between equity and debt. Equity finance represents ownership rights in the firm issuing equity, and may be raised 3 CHAPTER 1 Introduction to Financial Market Instruments M. Choudhry et al., Capital Market Instruments © Moorad Choudhry, Didier Joannas, Richard Pereira and Rod Pienaar 2005 either by means of a share offer or as previous year profits invested as retained earnings. Equity finance is essentially permanent in nature, as it is rare for firms to repay equity; indeed in most countries there are legal restrictions to so doing. Debt finance represents a loan of funds to the firm by a creditor. A useful way to categorise debt is in terms of its maturity.
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