Understand what is new issue market: You already might have heard of the Primary market and Secondary market. The primary market is often called a new issue market. But what exactly is the new issue market?
This article will delve deep into understanding what is the new issue market. Read on to find out more about this market.
Definition of New Issue Market
A new issue market is where a stock or bond is being sold to individuals for the first time. This new issue can either be an Initial Public Offering (IPO) or a new issue floated by an enterprise that has floated several issues in the past. A market that focuses on these new issues is called the new issue market.
On the other hand, the secondary market deals with existing shares and bonds. IPO is the process of offering shares of a private company to the public in a new stock issuance for the first time. Simply put, the primary market is known as the new issue market because securities are sold for the first time in this market.
Now that you have a fair understanding of what is new issue market, let us now look at 3 bodies directly involved in this transaction. The whole transaction in the new issue market is something like this- company raises funds through IPO by selling some of its shares to some of the interested investors.
The cost for the total securities involved in this selling is calculated by underwriters. Therefore, the company, investor, and underwriter are 3 parties involved in the new issue market.
Functions of New Issue Market or Primary Market
If you want to understand what is new issue market, first it is important to have a glimpse of the functions they perform. The new issue market plays the role in providing both private and public issues.
The new issue market is the place where new and fresh stocks or bonds are offered to the general public for the first time. Apart from these asset classes, the companies can also issue bills, notes, etc.
However, this process needs to be followed with a few strict rules. To protect the interests of major and minor investors, such rules and markets are regulated by the Security Exchange Board of India (SEBI).
The underwriters start their work by issuing shares of the company that doesn’t trade on any exchanges. More often than not, these underwriters are investment banks or merchant bankers.
They have a significant role to play in the new issue market. These underwriters take the responsibility of guaranteeing a certain portion of fundraising for the proposed issue. For these services, they earn commissions. Later, these underwriters sell the securities to investors applying for an IPO in the primary market.
The distribution function of new issues can take place in the primary market. Distributions are made by merchant bankers using the Draft Red Herring Prospectus (DHRP). The proposed issue is heavily advertised by conducting investor roadshows.
What Are The Advantages Of New Issue Market?
New issue markets give investors the advantage of investing in a company before it gets listed, among other things. It also allows the company to raise capital with high liquidity.
Some of the advantages of the new issue market are –
- Raises Fresh Capital For the Company
- Provides new investment opportunities to the public
- Lowers cost of capital for companies
By now, you must have had a fair idea of what is new issue market, is and what functions are performed by it. In short, any company can sell securities to raise funds.
This can be done for several reasons such as business expansion or infrastructure development. A new issue market is a place where investors are allowed to purchase securities directly from the issuer.
By choosing to raise funds from the new issue market, the companies can save their interest expenses. The primary market offers the liquidity of securities by IPO.
Apart from these advantages, the securities which have been bought on fresh issues can be sold easily in the secondary market. Therefore, the risk of investment is quite low.
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