The primary market or issuance market is that financial market in which negotiable securities are issued and in which the securities are therefore transmitted for the first time. The stock markets are divided into primary and secondary markets, separating the securities issuance phase and its subsequent trading. The primary markets are those in which the financial assets exchanged are newly created, the bidders of securities in the market are the entities in need of financial resources and that come to this market to issue their securities, on the side of the plaintiffs they are the investors, who with surplus of financial resources go to these markets to acquire titles. The securities are issued in the primary market that serves to attract savings and therefore involves the acquisition of new financing and then the securities already acquired are traded in the secondary market that would become a second-hand market or resale.
Placing shares in the primary market always involves an increase in the capital stock of a company. On the contrary, secondary market shares are securities already existing in the company that do not imply an increase in the share capital.
An example of a primary market is a capital increase of a company that issues shares for a certain value. Subsequently, these shares may be transferred on the stock exchange, which is therefore a secondary market.
In direct sales, investors acquire securities without the participation of entities or intermediaries. Securities issues in the primary market may be a public offering of securities, addressed to the public or a private placement, restricted to a specific group of investors. In the private placement, large packages of shares or obligations are transmitted to institutional investors (banks or insurance companies, investment funds, pension funds, among others) that invest large resources in transferable securities. Its advantage is that it produces lower advertising expenses. and commissions, gives greater negotiation flexibility and also faster.
Indirect placement is the sale in which financial intermediaries are used to make the issue. Investment banks often act as intermediaries between the issuers of securities and potential subscribers. The issue can involve a bank or a group that form a union, can adopt various modalities:
- Firm sale: The intermediary entity facilitates the sale and acquires the commitment to keep the securities that are not sold, is the preferred mode for companies but also the most expensive.
- Sale on commission: The intermediary entity charges a commission per title sold but does not guarantee its sale.
The performance of the investment banks in these operations is basically two, they serve as intermediaries between the issuers of the securities and potential subscribers and also serve as financial advisers in terms of issue price and the most appropriate time for the launch.