Primary Market | Advantages | Classification of Securities

A primary market is one in which new securities are offered to the investing public for the first time. Hence, it is also called new issue market.

Primary Market - Advantages, Classification of Securities

Image: Primary Market – Advantages, Classification of Securities

Advantages of primary market or the New issue market

1. It provides opportunity for new investors to start new enterprises: Persons with technical know-how may resort to promote new ventures which are profit-oriented. The new issue market gives them an opportunity to materialize their ideas.

2. Existing companies will be in a position to expand their activities: When the existing companies find their products obsolete, they would like to venture into new areas of production for which they require additional capital. The new issue market helps them raise the required funds.

3. Promotion of partnership firm into Public Limited companies or merger of companies or facilitates buy-back of shares: When new ventures are started, a management may wish to have a control on the ownership and for this purpose, they would like to enter into a buy-back arrangement. By this arrangement, the shares will be issued to a group of persons (NRIs) for a specific period after which they will be bought back from out of the profits. This ensures the retention of ownership and prevents any change in management.

Classification of securities in Primary Market

Securities dealt in the new issue market or primary market are classified as

  1. Equity Shares.
  2. Preference Shares.
  3. Debentures.

1. Equity shares: These are shares issued by companies for raising capital. The owners of these shares are shareholders. Normally, the face value of the shares may be Rs.10 or Rs.100. A group of fully paid shares are called stock and these can be transferred. The shareholders are entitled for profit, which are distributed to them in the form of dividend. The share capital will be refunded to them only during the winding up of the company, provided the company has sufficient assets.

2. Preference shares: Preference shares are similar to equity shares but are given on a preference basis to certain shareholders like promoters, auditors, etc. There are cumulative, non-cumulative, participating, redeemable, irredeemable, convertible and non-convertible preference shares. Preference shareholders will get the first preference in the distribution of dividend over equity shareholders. The same condition applies in the repayment of capital at the time of winding up.

3. Debentures: It is a loan obtained by the company from the public for a fixed interest rate for a fixed period. Those investors who do not want to take any risks will prefer debentures as they have less risk on the repayment compared to shares. There are debentures which have mortgage charge on the assets of the company and these debenture holders are assured of the repayment.

Leave a Reply

Recent Posts

Related pages

definition arrearsnominal ledger definitionmeaning of objective in tamilmanagement accounting cash budgetsubstandard assetequation for quick ratiofunction of rbigratuitous bailment examplemerits of capitalismwhat information is needed to prepare a cash budgetessential qualities of a good business letterhow to prepare cash budget accountingpurchase price variance definitionegm general meetingoligopoly disadvantagesdefine swaps financeloyalty cards advantages and disadvantageslimitation of absorption costingdifference between ebusiness and ecommerce pptdepositary participantinterfirm comparisonapportionment accountingadvantages and disadvantages of magazinesimportance of elasticity of demand and supplyretained profit advantagesbudgetary control definitionmultidomestic strategy definitionmaster budget componentsfeatures of mixed economy systemadvantages and disadvantages of running a franchisewhat is meaning of hufaccount payable turnover days formulacif fobformula for gearing ratioaccounting tick marksfactors affecting delegation of authoritydisadvantages of mixed economymode of operandi meaningdefinition of capital rationingimplementing tqm in an organizationanalysing business environmentdefinition amalgamateddefinition of direct labourqualities of a businessmanjoint stock company advantages and disadvantageswhat is non convertible debenturescost of material consumed meaningflat file system disadvantagesexamples of managerial accounting reportsdefine demeritconvertible preference shareswto wikiactivity based costing advantagesauditor negligence definitionfilling and indexingmethods of controlling sales forcemarketing mix modificationqualities of auditorsdiagonal mergersimilarities between cost accounting and financial accountingwhat is meant by mboparticipative leadership style advantages and disadvantagesproforma of fund flow statementcontingently liableadvantages and disadvantages of computerized accountingdemerits meaning in hindisebi guidelines for ipomeaning of mixed economic systemlabour price varianceadvantages and disadvantages of the factory systemadvantages and disadvantages of economic order quantityimportance of marketing segmentationexample of securitizationpay back period methoddifferences between stocks and bondscost variance calculationmeaning of ultra vires in lawdisadvantages of hire purchaseadvantages and disadvantages of process costingdischarge of contract by frustrationleverage ratios analysis