Primary market

Definition

The primary market is a financial market where new securities, such as stocks and bonds, are issued and sold to investors for the first time. Companies use this market to raise capital by offering shares directly to institutional or retail investors.

5 Must Know Facts For Your Next Test

1. In the primary market, securities are purchased directly from the issuer.
2. Initial Public Offerings (IPOs) are a common example of transactions in the primary market.
3. Funds raised in the primary market go directly to the issuing company for business expansion or other needs.
4. Investment banks typically underwrite primary market transactions, ensuring that securities are sold at an appropriate price.
5. Once securities are sold in the primary market, they can be traded among investors in the secondary market.

Review Questions

• What is the main purpose of the primary market?
• How does an Initial Public Offering (IPO) relate to the primary market?
• Who typically underwrites transactions in the primary market?

Related terms

Secondary Market:

The financial market where previously issued securities are traded among investors.

Underwriting:

The process by which investment banks act as intermediaries between issuers and investors, often guaranteeing a certain price for new securities.

Initial Public Offering (IPO): The first sale of stock by a private company to public investors, marking its transition to a publicly-traded entity.