The main functions of primary market are described below:
1. Organisation of New Issues:
The organisation of new issues requires investigation of viability and prospects of new projects. An important element of the organisation of new shares is the knowledge about adequacy and structure of financial arrangements.
The structure of financial arrangements involves requirements and availability of promoter’s equity, equity from public, debt-equity ratio short term funds, liquidity ratio, and foreign exchange requirement. All this requires a careful study of the new issue by competent and well trained staff.
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2. Underwriting of New Issues:
ADVERTISEMENTS:
Another step involved in floating a new issue is its underwriting. The term underwriting means guaranteeing purchase of a specified amount of new issue at a fixed price. The purchase may be for sale to the public, for only one’s portfolio or for both the purposes.
If the underwriter fails to sell the guaranteed amount of shares to public, it will have to purchase the unsold shares by itself. The underwriter is paid a commission for underwriting the new issue. Mostly underwriting of a new issue is undertaken by a group of financial institutions.
3. Distribution of New Issue:
Distribution of new issues means the sale of the stock to the public. There are three main ways of selling the new issue to the public.
ADVERTISEMENTS:
(a) Issue of a Prospectus to the Public:
The issue is sold to the public by issuing of prospectus. Prospectus is an invitation to the public to purchase the issue. The issue of a public prospectus is done through advertisement. It gives details about the company, issue and the underwriters.
(i) It Provides Liquidity:
The main function of the secondary market is to provide liquidity to securities. Liquidity of an asset means its easy convertibility into cash at short notice and with minimum loss of capital value.
ADVERTISEMENTS:
The liquidity is provided through a continuous market for securities, that is, a market where securities can be bought and sold at any time during business hours at small transaction cost.
(ii) The function of providing liquidity to old stocks is important (i) For attracting new finance (ii) for encouraging prospective investors to invest in securities. They know that any time they want to get out of them into cash they can go to the market and sell them off.
(b) Encouragement to New Investment:
The new investment is also influenced by the secondary market. It acts as an important indicator of the investment climate in the economy. When stock prices of existing securities are rising and the volume of trading activity in the secondary market goes up, new issues also tend to increase as the primary market is better preferred. This is also a good time for companies to come forward with new issues On the other hand, when the secondary market is in doldrums the new market is also discouraged.