Friday, July 16, 2010

An Introduction to Primary Equity Markets

The equity market is a term used in synonymous to the much popular and layman term – The Stock Market. The equity market in any country plays a vital role in providing liquidity to companies that want to raise capital for investments in company infrastructure and development, or to invest in some portion of the economy that would yield the best returns to the company itself and its shareholders.

The equity market or the stock market is a bridge that narrows the gap between investors and issuers. It is a market through which provides access to companies to capital, and in turn, to the investors in the form of holdings in the ownership of the company; thus, providing hope of capital gain in the form of price appreciation of the shares of the company or through other modes such as dividends, bonus and rights issuance.

The equity market is divided into two sub forms: the primary equity market and the secondary equity market. The primary equity market is one where new companies offer the market new shares, termed as – IPO (Initial Public Offering). The purpose of this initiative of distributing new shares to the market is, as explained, to generate new capital for the firm/company from pool of investors. IPOs are used as a source to generate funds for long-term debt purpose as opposed to the short-term debt provided by banks/financial institutions. Similarly, other ways of primary form of equity issues are through Rights issue, and offer for sale.

The concept of IPO is usually to allow ownership of the company to mass public in general to utilize and accumulate pool of funds available from small investors. However, in the United States, the remaining shares that have not been consumed by the general public are offered to banks/investment firms willing to buy those remaining shares. These banks/firms are called underwriters. At times, single major companies are also the ones allotted all the IPOs on the preferred price by the company that releases it, thus giving no chance to the general public to invest.

Moiz Damani is currently a student at Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, pursuing an MBA degree with specialization in Finance.

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