In finance, the place where the shares sell for the very first time is called the primary market. The primary market is an important part of the capital markets. It gives young companies access to money to fund operations. It also helps the economy by creating new jobs and bringing in additional tax revenue.
The term "market" refers to the place where investors buy and sell securities, including stocks, bonds and additional financial instruments. Prominent in the primary market are the investment banks that set the prices for a securities companies are ready to sell to investors for the first time. The investment banks sell the securities directly to investors.
Initial Public Offering
An initial public offering, which is conducted in the primary market, marks a corporation's transition from private to public. An IPO can bring in millions of dollars, enriching the company and its shareholders. An investment bank oversees the IPO, sets the price and sells the shares by soliciting investor interest. Investors receive a preliminary prospectus -- also called a "red herring" -- that provides details about the company, its operations, management team, earnings and future outlook. It is not uncommon for the shares in an IPO to rise substantially on the first day of trading, often within minutes.
Although the sale of a security through an IPO takes place in the primary market, the secondary market -- which consists of exchanges and over-the-counter markets -- is where most buying and selling of securities takes place. An exchange facilitates the trading of securities among market participants such as stock brokers, traders and institutional investors. Each exchange has its own listing requirements. For example, one of the listing requirements on the New York Stock Exchange is that a company must have $10 million in aggregate pre-tax income for the last three years.
An IPO receives a lot of attention because investors get first crack at a company's shares, which could potentially yield huge profit. Just imagine being one of the first investors in such household names as Wal-Mart, Apple or Microsoft. However, it's not all roses. Instead of rising, a security's price could actually decline in value for a number of reasons, like a sudden and unexpected downturn in the issuing company's fortunes. In general, investing is risky. While you have a chance to make a profit in the primary market, you also stand the chance of losing all of your money. A number of security offerings are conducted in the primary market each year. A financial adviser or stock broker can help you navigate through such offerings.