Page 23 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes

Notes Many people divide the Capital Market into Bond Market and Stock Market.

1. Bond Market provides financing by bond issuance and bond trading.
2. Stock Market provides financing by shares or stock issuance and by share trading.

As a whole, Capital Market facilitates raising of capital through the trading of long-term financial
assets.

2.2.1 Primary Capital Market

The primary capital markets is also called the New Issue Market or NIM. The securities which
are introduced in the market are sold for first time to the general public in this market. This
market is also known as the long-term debt market as the fund raised from this market provides
long-term capital.
The act of selling new issues in the primary capital market follows a particular process. This
process requires the involvement of a syndicate of the securities dealers. The dealers who are
running the process get a certain amount for as commission. The price of the security offered in
the primary capital market includes the dealer, commission also.
Again, if the issue is a primary issue, the investors get the issue directly from the company and
no intermediary is needed in the process. For the purpose, the investor needs to send the exact
amount of money to the respective company and after receiving the money, the particular
company provides the security certificates to the investors.
The primary issues which are offered in the primary capital market provide the essential funds
to the companies. These primary issues are used by the companies for the purpose of setting new
businesses or to expanding the existing business. At the same time, the funds collected through
the primary capital market, are also used for the modernization of the business. At the same
time, the primary capital market is also involved in the process of creating capital for the
respective economy.
There are three ways of offering new issues in the primary capital market. These are:
1. Initial Public Offering (IPO): An IPO is the first sale of stock by a private company to the
public. IPOs are often issued by smaller, younger companies seeking the capital to expand,
but can also be done by large privately owned companies looking to become publicly
traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine
what type of security to issue (common or preferred), the best offering price and the time
to bring it to market.

2. Preferential Issue: A preferential issue can be defined as an issue of stock available only to
designated buyers. These buyers are a select set of people, whether promoters, their
relatives, or institutional investors.

One could call it a wholesale equity market since the retail investors or shareholders are
not invited to participate.
3. Rights Issue: The rights issue is a special form of shelf offering or shelf registration for
existing Companies. With the issued rights, existing shareholders have the privilege to
buy a specified number of new shares from the firm at a specified price within a specified
time.

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