Primary Securities Market
The term primary securities market is used to describe a portion of the capital market where new securities are issued by companies, government entities or public institutions. Also referred to as the new issues market (NIM), companies initially sell both stocks and bonds on the primary market.
When companies issue new securities, they are purchased in the primary securities market. For example, when a company “goes public,” its initial public offering (IPO) takes place in the primary market. The distinguishing characteristics of these securities include:
- Capital Formation: the issuer of the security obtains financing through the sale of equity (stocks) or debt (bonds). The money received is then used to improve or expand operations.
- Initial Offerings: the bonds or stocks are offered to the public for the first time.
- Flow of Funds: the transaction occurs between the investor and the issuing entity. While an investment bank may help facilitate the sale of these securities and collect a fee for this service, the majority of the funds received from investors flow to the issuer.
The examples of primary securities are relatively few and include common and preferred stock, corporate bonds, as well as government debt issues (bonds, notes, bills). This is in sharp contrast to the secondary market, which includes more complex securities as well as greater trading volumes.