A primary market is a market in which a corporation or government entity sells securities directly to investors. A common example of this type of transaction includes an IPO when a company issues shares of stock for the first time. The primary market is different from the more prevalent secondary market, where investors can trade securities with one another.
Learn how the primary market works, the most common types of primary market transactions, and how the primary market differs from the secondary market.
Definition and Example of the Primary Market
The primary market is where the issuer of securities offers those securities directly to investors and the issuer receives the proceeds.
There are different primary markets that are classified by the type of securities sold. For example, the primary capital market refers to the sale of assets by corporations to investors. The primary debt market refers to the sale of bonds from corporations or government entities to investors.
One example of a primary market transaction is the initial public offering (IPO) of Airbnb in December 2021. The company issued 50,000,000 shares of Class A common stock. The IPO was a primary market transaction because it was at that time those 50,000,000 securities were initially created and the first time they were sold to investors.
In the same registration statement where Airbnb announced their IPO, they also announced the sale of 1,551,723 shares from existing shareholders. The sale of those securities were not primary market transactions because it wasn’t the first time those securities were being sold, nor were they being sold from the issuing company to investors. Instead, they were secondary market transactions because the securities were already on the market and were sold among investors.
How the Primary Market Works
The primary market isn’t a physical location like your local food market. Instead, it refers to a type of transaction where a security is sold by the issuer directly to an investor. The purpose of the primary market is for issuers—often corporations or governments—to raise capital.
In most primary market transactions, an investment bank underwrites the securities sale and acts as an intermediary. The underwriters facilitate the sale and find investors to buy the securities.
If a primary market transaction occurs via a public offering, then there are additional requirements for the issuing company. The Securities Act requires that companies that issue public shares in the primary market file a registration statement with the Securities and Exchange Commission (SEC) and share critical information about the company.
Consider our example of Airbnb’s 2020 IPO. Prior to issuing its public shares, the company filed Form S-1 with the SEC, where it disclosed information about the company, its securities offering, and more. The offering was facilitated by a team of underwriters that included Morgan Stanley and Goldman Sachs & Co.
Types of the Primary Market Offerings
The market primary can refer to different markets depending on the type of security a company offers. In the case of equity offerings, there are generally three types of primary market offerings.
Initial Public Offering (IPO)
An IPO is one of the most common types of primary market offerings. In this type of offering, a company “goes public” or offers securities to the public for the first time. These public offerings require that a company register with the SEC, and they’re often facilitated by underwriting investment banks.
Though any investor can technically participate in an IPO, these securities aren’t always widely available. Often IPO shares are available only to clients of the underwriting banks. In many cases, the initial investors are institutional investors such as mutual funds and pension funds, along with some high-net-worth individuals.
Investing platforms like Robinhood and SoFi started offering certain IPOs to their customers in 2021.
A private placement is another type of primary market offering where an issuing company sells securities to investors. But unlike an IPO, a private placement isn’t a public offering. Instead, it’s available only to certain sophisticated investors.
As with an IPO, an investment bank usually helps a company to facilitate a private placement. Companies may opt for this type of offering because they require less regulation and lower costs, and allow quicker access to capital.
Accredited investors tend to participate in private placement offerings. An accredited investor is an individual with more than $200,000 in annual income, more than $1 million in net worth, or a Series 7, 65, or 82 licenses in good standing. An accredited investor can also be a trust or other entity that meets certain asset requirements. SEC rules allow for up to 35 non-accredited investors can participate in a private placement.
The final type of primary capital market offering is a rights offering. In this type of transaction, a company that has previously issued public shares offers additional shares to its existing shareholders.
This type of transaction benefits both the company because it raises additional capital. However, investors tend not to like rights offerings because if they don’t purchase additional shares, their percentage of ownership in the company decreases, a concept known as dilution of shares.
Primary Market vs. Secondary Market
|Primary Market||Secondary Market|
|The first sale of a security||Subsequent sales of existing securities|
|Proceeds go to the issuing entity||Proceeds go to the selling investor|
|Facilitated by underwriting investment banks||Facilitated by brokers|
The term “primary market” only refers to those transactions where the issuing entity issues a security for the first time and sells to an investor. Future sales of the same securities are considered secondary market transactions.
There are a few key differences between primary and secondary market offerings, aside from the types of transactions included. A primary market offering is one that a company or another entity issues as a way to raise capital. They get the proceeds of the security sale. But in the case of a secondary market offering, the security’s current owner gets the proceeds.
Imagine you purchased a share of Airbnb’s stock during the IPO. It would have been considered a primary market transaction, and Airbnb would have received the proceeds of the sale. But when you turn around and sell your share of Airbnb to another investor, the company doesn’t get the proceeds of that sale—you do.
Another difference between primary and secondary markets is the intermediary involved. As we discussed, primary market offerings usually have an investment bank that acts as an underwriter. But in the case of a secondary market offering where one investor sells a security to another, it’s the brokers that serve as intermediaries, arranging trades for their clients.
What It Means for Individual Investors
As an individual investor, you may not have encountered a primary market offering before. As we discussed earlier, these offerings are often available to only certain shareholders. In the case of IPO transactions, securities are often available only to institutional investors and the clients of the underwriting investment banks. And in the case of private placements, only accredited investors can participate.
Individual investors are more likely to participate in secondary market transactions. Any time you buy an individual stock or invest in a mutual fund or exchange-traded fund (ETF) through your retirement account or taxable brokerage account, you’re participating in a secondary market sale.
If you do have the opportunity to be a part of a primary market offering, it’s important to understand the unique risks. According to the SEC, IPOs are often speculative investments, meaning there’s more risk for the buyer. And in the case of a private placement, not only are the investments higher-risk, but they are also more illiquid, as an accredited investor can’t simply turn around and sell their holdings in a secondary market as they can with public shares.
- The primary market is a financial market where corporations and government entities sell securities to investors for the first time.
- Primary market offerings fall into three typical categories: IPOs, private placements, and rights offerings.
- Make primary market offerings are available only to institutional or high-net-worth investors, either due to federal regulations or relationships with investment banks.
- The other type of market is the secondary market, which is where investors resell securities after the initial primary market offering.
Securities and Exchange Commission. "Form S-1 Registration Statement: Airbnb, Inc.," Page 56. Accessed Dec. 7, 2021.
Securities and Exchange Commission. "Going Public." Accessed Dec. 7, 2021.
Securities and Exchange Commission. "Amendment No. 2 to Form S-1 Registration Statement: Airbnb, Inc.," Page 2 of introduction. Accessed Dec. 7, 2021.
SoFi. "Introducing Early Access to IPOs." Accessed Dec. 7, 2021.
Securities and Exchange Commission. "Form S-1 Registration Statement: Robinhood Markets, Inc," Page 58. Accessed Dec. 7, 2021.
Securities and Exchange Commission. "Private Placements: Rule 506(b)." Accessed Dec. 7, 2021.