Primary Market
The primary market is where new securities are issued and sold for the first time, with proceeds going directly to the issuing company or government—including IPOs and new bond offerings.
Exam Tip
Primary market = NEW securities, proceeds to ISSUER. Secondary market = existing securities, proceeds to SELLER.
What is the Primary Market?
The primary market is where securities are created and sold for the first time. When a company issues new stock through an IPO or a government issues new bonds, these transactions occur in the primary market. The issuer receives the proceeds directly.
Primary vs. Secondary Market
| Feature | Primary Market | Secondary Market |
|---|---|---|
| Securities | New issues only | Previously issued |
| Proceeds | Go to issuer | Go to seller |
| Example | IPO | NYSE, NASDAQ trading |
| Pricing | Set by underwriter/issuer | Set by supply/demand |
Types of Primary Market Offerings
| Type | Description |
|---|---|
| IPO (Initial Public Offering) | First public sale of stock |
| Follow-on Offering | Additional shares after IPO |
| Private Placement | Sale to select investors |
| Bond Issuance | New corporate or government bonds |
| Rights Offering | New shares to existing shareholders |
The IPO Process
| Step | Activity |
|---|---|
| 1 | Company selects underwriter(s) |
| 2 | Due diligence and registration (S-1) |
| 3 | SEC review and comments |
| 4 | Roadshow and book building |
| 5 | Pricing and allocation |
| 6 | Trading begins on exchange |
Underwriting Methods
| Method | Description | Risk |
|---|---|---|
| Firm Commitment | Underwriter buys all shares | Underwriter bears risk |
| Best Efforts | Underwriter sells what they can | Issuer bears risk |
| All-or-None | Must sell all or deal cancelled | Shared risk |
| Mini-Max | Minimum must be sold | Partial protection |
Who Participates in Primary Market
| Participant | Role |
|---|---|
| Issuer | Company/government selling securities |
| Underwriter | Investment bank managing sale |
| Syndicate | Group of underwriters sharing risk |
| Investors | Institutional and retail buyers |
| SEC | Regulatory oversight |
Key Documents
| Document | Purpose |
|---|---|
| Registration Statement | Full disclosure to SEC |
| Prospectus | Investor disclosure document |
| Red Herring | Preliminary prospectus |
| Tombstone Ad | Announcement of offering |
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Related Terms
Secondary Market
SecuritiesThe secondary market is where previously issued securities are bought and sold between investors, with proceeds going to the selling investor rather than the issuing company—including stock exchanges like NYSE and NASDAQ.
IPO (Initial Public Offering)
SecuritiesAn IPO is the first sale of stock by a private company to the public, allowing the company to raise capital from public investors and become publicly traded.
Underwriting
InsuranceUnderwriting is the process by which an insurance company evaluates risk and determines whether to accept an application for coverage and at what premium rate.
Prospectus
GeneralA prospectus is a legal document filed with the SEC that provides details about an investment offering, including risks, fees, objectives, and management.