2.13:
Types of Capital Market: Primary Market
The capital market is a financial system where long-term debt and equity securities, such as stocks, are traded to facilitate economic growth by providing businesses with the capital they need for expansion and development.
The two types of capital markets are primary markets and secondary markets.
A primary market is where new securities like stocks and bonds are issued and sold for the first time.
This market serves as the channel for companies, governments, and other entities to raise funds directly from investors.
For example, Salt Corporation decided to go public by issuing shares to investors for the first time through an initial public offering.
The company will be assisted by underwriters, usually investment banks, to determine the share price, manage the sale of shares, and ensure compliance with regulatory requirements.
The funds raised through the sale of stock provide capital for the company.
The company's shares will then be listed on the stock exchange, and the securities will further be traded through the exchange.
The performance of securities in the primary market influences its secondary market performance, indicating the investor's confidence in investing in a business.
2.13 Types of Capital Market: Primary Market
The primary market is essential within the capital market. It focuses on the initial issuance of new securities and provides a platform for corporations and governments to secure funding directly from investors by offering newly created financial instruments such as stocks and bonds.
In the primary market, initial sales occur through initial public offerings (IPOs) and bond issuances. For instance, when GreenTech Solutions decided to expand its operations, new shares were issued through an IPO. The company collaborated with investment banks, known as underwriters, to set the share price, manage the distribution, and ensure regulatory compliance. These activities are pivotal for businesses seeking to finance expansion, innovation, or debt restructuring.
The primary market has a significant impact on capital allocation and promotes efficient resource distribution, which in turn fosters economic growth. It also provides investors with opportunities to participate in early-stage investments, making the market more dynamic. After the initial sale, the securities become available for trading in the secondary market. This secondary market ensures liquidity, which means that investors can buy and sell these securities easily, and this continuous participation is what keeps the market active. The success in the primary market often sets the tone for subsequent trading, reinforcing the interconnectedness of primary and secondary markets within the financial system.