What is the primary market and how can you invest?
Ever wondered what the primary market is? Here, we take you through everything you need to know about the primary market, including why it’s important for IPOs and how you can get exposure to it.
What is the primary market?
The primary market is where securities like stocks and shares are created. A major component of the primary market is intital public offerings (IPO), which is how many companies go from being private to publicly listed.
Often, the primary market is where investors can secure stock allocations for upcoming IPOs before the IPO has taken place. This enables them to take a position at the IPO price for the shares, before the market factors of supply and demand affect prices on the secondary market.
That said, the primary market isn’t as easily accessible as the secondary market, and there are different types of primary market issues.
What are the types of primary market issues?
Generally speaking, there are three types of primary market issues:
- IPO: the ‘traditional’ way that companies issue shares on the primary market, an IPO involves a private company becoming publicly traded. IPOs are normally lengthy and expensive, and a whole range of checks need to be carried out before the company is allowed to list.
- Equity placement: a less conventional way for companies to issue shares on the primary market, an equity placement or just ‘placement’ lets the company sell its stock to a small group of private investors. Placements are not as lengthy or expensive when compared to IPOs – but they also encourage less scrutiny of a company’s financials.
- Rights issue: reserved for existing shareholders, a rights issue gives people that already own company stock the opportunity to buy new shares on the primary market at a discounted price compared to the current market value of the stock.
How does the primary market work for IPOs?
The primary market for IPOs is where a company will release its shares before the company is fully listed. The primary market is usually where institutional investors – like banks or other corporate interests – will take a position on a company’s upcoming IPO.
Here’s how the primary market process works for IPOs:
- A company decides to list its shares to the public, and an audit is carried out by a regulator like the Financial Conduct Authority (FCA).
- After the audit, and subject to any terms and conditions, a registration document is prepared by the company and sent to the stock venue that it wants to list on, like the London Stock Exchange (LSE).
- The company decides how many shares it wants to list, and an underwriter is brought in to determine a target price range for the shares.
- The shares are then listed on the primary market, and investors can place their bids to receive their stock allocation once the company carries out its IPO.
- Once the company has completed its IPO, the primary market will close and the secondary market will open – which is where the majority of share transactions take place.
How can you invest in the primary market?
Retail clients can also invest in the primary market, though for the most part it’s dominated by institutional investors.
For example, with us, you can invest in the primary market for a company’s share issue by subscribing to the IPO ahead of time. By subscribing, you’ll become eligible to receive a stock allocation at the same time and for the same price as institutional investors – meaning that you won’t need to wait for the secondary market to open to take your position.
Learn more about our primary market subscriptions
To invest in the primary market, you’ll need to create a share trading account with us, and link it to your account with PrimaryBid. This means that you’ll also benefit from our best share trading commission rates.
What is the secondary market?
The secondary market is where securities like stocks and shares can be bought and sold between retail and institutional investors. It’s also where derivative trading takes place. With us, you’ll be able to take a position on company shares on the secondary market with share trading when you create a trading account.
Learn about the impact of leverage on your trading
As a result, it’s important that you take steps to manage your risk. We’ve got a range of educational risk management material at IG Academy – our free resource for beginner and experienced traders alike.
The primary market summed up
The primary market is where shares are created and sold to investors before they’re freely available on the secondary market.
Institutional investors are usually active in the primary market, but retail investors can also take a position on primary market issues.
You can take a position on the primary market with us for certain IPOs through our partnership with PrimaryBid.
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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