The Primary Market
Like buying brand new, from the dealership (underwriter).
The primary market is defined by sales of securities for the first time. While there are varying forms of the primary market, all transaction proceeds go back to the issuer. We’ve discussed initial public offerings (IPOs) in previous chapters, which is a type of primary market. After the issuer raises capital (money) from the primary market sale, the security is traded in the secondary market. 4 roles exist when discussing the primary market:
issuers,
underwriters,
investors, and
the SEC.
Issuers
Sell securities to raise capital
Issuers can be anyone from a small start-up company to the government
Examples: US Government, City of Los Angeles, Verizon, Microsoft, Visa
Underwriters
Hired by issuers to sell new issues
Also known as investment banks
Underwriters have many roles, ranging from general advice to actually selling the security
Often, a lead underwriter will have other financial firms assist the lead underwriter with the sale
Examples: Morgan Stanley, JP Morgan, Goldman Sachs
Securities Exchange Commission (SEC)
Requires issuers to register securities unless an exemption exists
the goal of registration is to confirm the issuer and underwriter are providing the public with enough information to make an informed decision
Underwriting Commitments
Firm underwriting commitments
Underwriter liable for unsold shares
Also known as:
Principal transactions
Dealer transactions
Best efforts underwriting commitments
Issuer liable for unsold shares
Also known as agency transactions
Mini-max commitments
Type of best efforts commitment
Minimum shares must be sold, up to a maximum
All or none commitments
Type of best efforts commitment
All shares must be sold
