Investment

What is Primary market in Nigeria?

What is primary market – The concept of market involves a setting where people buy and sell/trade commodity of choice, however, in this concept market is viewed as the arrangement in the financial and investment market.

What is Primary market?

The primary market is a market where securities begin to announce their arrival, it’s a market where securities are created and from there they can move to the larger market possibly the secondary market where investors interact with each other for buying and selling of securities.

Points to note

  • Companies sell new stocks, bonds in the primary market for the first time, this may be referred as the “Initial Public Offering.”
  • The primary market is the birth ground of securities.

Significantly, IPO comes to existence when a private company issues stock to the public for the first time.

Prior this, the company hires underwriting firms to ascertain the financial status of its IPO, it’s reposed on the underwriting firm to detail the issue price of the stock, thereafter investors can buy the IPO at the set price directly from the company issuing such stock.

The funds generated compounds to the company’s equity capital, arising from the opportunity investors were availed to purchase such equity for the first time.

How to raise funds from the Primary market

1. The right issue: This is the arrangement where companies raise capital through the primary market arrangement from existing shareholders, this usually applies after such security has entered the security market and running effectively.

Existing investors get offering with recourse to shares they hold already at discounted price, where the newly minted shares stand to be taken by new investors too.

In this arrangement, both the existing and new investors can access the shares.

2. Private placement: This is an arrangement where the companies sell their shares directly to significant investors comprising the banks and hedge funds without making such shares public or open for regular investors.

3. Preferential allotment: Under the preferential allotment, shares are being offered to select investors on a preferential basis, investors who are considered under this arrangement are, hedge funds, mutual funds and banks.

They are usually allotted with a special price not available for the public.

The secondary market

The Secondary market is the advanced market where you can buy existing stocks who have passed their initial public offering from other investors, not necessarily from the company who made such offering.

You can buy existing shares at the Secondary market any time provided you can afford its unit price.

The Secondary market allows you to buy at your own pace, the stock is always available for purchase, the beauty of it is that you can buy fewer stocks according to your budget.

Most of these purchases may have to go through certified brokers licensed to carry out such transactions under the dictate of the “Security and Exchange Commission (SEC).”

Related terms

Functions of primary marketThe primary market facilitates the company to raise long term funds by making fresh issues of shares or debenture.   The primary market makes for capital growth by availing individuals an avenue to convert savings into investment
Types of primary marketPrimary market issues include; Initial public offering (IPO), private placement, right issue, and a preferred allotment.
Primary market exampleThe Initial Public Offering (IPO) is an example of primary market
Advantage of primary marketCompanies raise capital at low costsSecurities issued can be sold immediately in the secondary marketIt enhances diversification, where risk is reducedUnder this arrangement price manipulation is low compared to secondary markets.  
Similarities between primary and secondary marketListing: The securities issued in the primary market are listed on a recognized stock exchange for dealings.   The listing provides liquidity and marketability to the securities where prices are discovered.   There’s control by stock exchanges: Through listing agreement between the company and the stock exchange, the stock exchange exercises control over new issues and securities listed on the stock exchange.
Features of primary issuesIt’s related with new issues
 It does not have a particular placeThere are various methods of floating capitalPublic issueOffer for salePrivate placementRight issueE-IPOs
What is primary market?The primary market is a market where securities begin to announce their arrival, it’s a market where securities are created and from there they can move to the larger market
Difference between primary market and secondary marketSecurities are created at the primary market, while securities created are traded at the secondary market.   The secondary market is the stock market, referred to as the Nigerian Stock Exchange.

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