Primary market concept
Primary markets, also known as financial asset issuance markets, are physical or virtual-electronic places where a company collects funds from the public through the issuance of new securities. That is, investors get newly created securities, which they buy directly from the issuer (as opposed to secondary markets, where previously issued securities held by other investors are traded).
However, purchases or sales of securities that were already in circulation are also considered primary market operations, when they are carried out through a public offering.
The primary market is right to exist because there are some applicants for financing, the issuers of the titles, who require capital and who can try to obtain it through the issuance of securities. These securities may be capital (variable income) or debt (fixed income).
In the first case, variable income assets are issued, which can pay dividends in the future to the owners of the shares, whose value will be traded on the secondary market, undergoing variations over time, so that, in some way, In this way, it could be said that the remuneration is going to be variable and dependent on the result obtained by the company; both in the event that the holder of the security waits for the dividends to be paid and in the event that he decides to sell the security he owns in the secondary market.
In the second case, fixed-income securities are placed that can be issued by a public or private company. The foreign capital is used with the obligation, on the part of the issuer, to return it within a certain period and repay it with the payment of periodic coupons.
Types of placement in the primary market
We can speak of two types of placement in the primary market: direct and indirect.
Direct placement: In direct sales, investors acquire the securities without the participation of entities or intermediaries. Securities issues in the primary market can be a public offering of securities, aimed at the entire public, or a private placement, restricted to a specific group of investors. In the private placement, large packages of shares or bonds are transferred to institutional investors (banks or insurance companies, investment funds, pension funds, etc.) who invest large resources in securities, the advantage being that they produce lower costs in advertising and commissions, grants greater flexibility of negotiation and also greater speed.
Indirect placement: The indirect placement is the sale in which financial intermediaries are used to carry out the issue. Investment banks often act as intermediaries between issuers of securities and prospective subscribers. A bank or a group that form a syndicate can intervene in the issue, it can adopt different modalities:
Firm sale: The intermediary entity facilitates the sale and acquires the commitment to keep the titles that are not sold, it is the preferred modality by the companies but also the most expensive.
Sale on commission: The intermediary entity charges a commission for each title sold but does not guarantee its sale.
Stand-by agreement: sale on commission and commitment to purchase unsold items at a special price.
The performance of investment banks in these operations are basically two, they serve as an intermediary between the issuers of the titles and the possible subscribers and they also serve as financial advisers in terms of the issue price and the most appropriate moment for the launch.
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