The primary markets
are those in which new issues of bonds, preferred stock, or common stock are sold by government units, municipalities, or companies to acquire new capital.
- New issue.
- Key factor: issuer receives the proceeds from the sale.
There are two important rules in the primary capital markets:
- Rule 415 allows large firms to register security issues and sell them piecemeal over the following two years. Such issues are called shelf-registration. This rule allows a single registration document to be filed that permits the issuance of multiple securities.
- Rule 144A allows corporations (including non-U.S. firms) to place securities privately with large, sophisticated investors. The issuer of a private placement reduces issuing costs because it does not have to complete the extensive registration documents. However, investors will require a higher return since no secondary market exists and thus the liquidity risk is high.
New stock issues are divided into two groups:
- Initial public offerings (IPOs). These are new shares that a firm offers to the public for the first time. They are typically underwritten by investment bankers through negotiated arrangements (the most common form), competitive bids, and best-effort arrangements (investment bankers act as brokers, not taking the price risk).
- Seasoned equity issues. These are new shares issued by firms that already have stocks outstanding.
A rights issue
is an option that a company can opt for to raise capital under a secondary market offering or by using a seasoned equity offering of shares to raise money. It is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege of buying a specified number of new shares from the firm at a specified price within a specified time.
Government bond issues are sold at Federal Reserve auctions.