The word Primary Market refers to facilities and institutions arrangements through which long-term funds; both debt and equity are raised and invested. The primary market is known as the new issues market. It deals with new securities being issued for the earliest time. The vital function of a primary market is to make easy the transfer of investable funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time. The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals.
A company can increase capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits. Funds raised may be for setting up new projects, expansion, diversification, modernization of existing projects, mergers and takeovers etc.
An example of a primary market is a company’s initial public offering, or IPO, in which it sells its stocks to the general public for the first time.
- Raising capital for business.
- Mobilizing savings
- Government can raise capital through sale of Treasury bonds
- Open market operation to effect monetary policy of the government i.e control of excess liquidity in the economy
- It is a vehicle for direct foreign investment.