Primary Capital Market - Short Notes

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Friends in our last post we have discussed the basics of Capital Market. Capital market can be classified into two types. Those are 1. Primary and 2. Secondary Capital Markets. In this post we shall discuss about Primary Capital Market. The Primary Capital Market is also called as direct or new issues market. It deals in new financial claims or new securities. In other words it is a market in which new issued capital instruments are sold and purchased. Hence it is called as New Issues Market. Thus primary capital market supplies fresh capital to the business units.

The main function of primary capital market is to raise funds through issue of new corporate securities. The enterprise which issues securities may be new or old. This involves attracting new investible resources in the corporate sector and their allocation among alternative uses and users.

Types of Securities 

Business enterprises raise their capital by issue of following three main types of securities.

1. Ordinary or Equity Shares
2. Preference Shares and
3. Debentures / Bonds

1. Ordinary or Equity Shares : These are the shares which confers ownership to the holders. Ordinary shareholders are the owners of the company. The investment in this capital instrument is permanent but they are highly liquid.

2. Preference Shares : These are the shares carrying preference in payment of dividend and capital at the time of winding up of the company over equity shares. This carries fixed rate of return called dividend. Preference share may by

1. Cumulative or non cumulative
2. Redeemable or Non-Redeemable
3. Participating or Non-Participating

3. Debentures / Bonds : Unlike shares, debentures are creditorship securities. These are simply credit instruments and does not confer any ownership. They bear a fixed rate of interest fixed maturity period Debentures may be

1. Registered or bearer
2. Redeemable or perpetual
3. Convertible or non convertible or partly convertible

Thats all for now friends. In our next post we shall discuss about th Secondary Capital Market (Stock Exchanges). Happy Reading :)

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