The capital market is divided into two segments: primary and secondary markets. The primary market is often referred to as the new issue market. We’ll talk about what is New Issue Market and strategies for floating securities in this market.
Table of Contents
What is New Issue Market?
A new issue is a stock or bond which is being offered for the first occasion to investors. This new issue may be a corporation’s Initial Public Offering (IPO) or a new issue floated by an entity that has previously floated several similar issues.
Where this issue will come is known as the new issue market. The new issue market is compared to the secondary market, which interacts with existing shares and bonds. The new issue market is also known as as primary market.
Important Points
- New issues, whether stocks or bonds, are a way for a business to raise money.
- An IPO is a form of stock offering that allows investors to purchase a formerly private organization’s stock for the first time.
- Bonds, preferreds, and convertible securities may all be issued as new issues to help a company collect debt money.
- Bonds are classified debt financing when they are issued as new issues, while stocks & IPOs are regarded as equity financing when they are issued as new issues.
- Investors should be mindful of the “hype” that surrounds a new problem such as an IPO, as it can swing either way.
- A secondary offering allows businesses that are already publicly traded to create a new issue.
Things not included in New Issue market
The New issue market excludes money in the form of loans from financial institutions since when a financial institution issues a loan, it is transforming private capital into public capital, which is referred to as going public.
Equity shares, debentures, bonds, preference shares, and other unique securities are typical securities issued on the primary market.
Functions of New Issue Market
- A new issue is a method of obtaining capital for a business. Companies can choose between issuing debt (i.e. borrowing) or issuing equity (i.e. stock) (i.e., selling a portion of the organization).
- Irrespective of the path they follow, when those securities are presented for sale they will be issuing a new issue. To collect funds for government activities, governments will issue new sovereign debt issues in the shape of Treasury securities.
- The new issue would be scrutinized using the debt route (i.e., issuing bonds) depending on the issuer’s creditworthiness to repay its commitments and entire economic capacity. Issuing bonds could be a choice that is not easily accessible if the company is a startup with no sales.
Keynote About function of new issue market
| There is a chance of “hype” surrounding a new issue, which can cause a firm ‘s stock to rise after its IPO & then plummet until the hype has worn off. When participating in new issues, investors must remain careful. |
However, if they can persuade investors that the business has long-term potential, the stock route can still be open. This is where venture capital (VC) & private equity companies will help the business grow and prosper in return for a share of the new business ‘s ownership
If the business is profitable it can attempt to go public by issuing a new issue via an IPO. Companies who have already gone public can use a secondary offering to create a new issue.
New Issue Market Example
Assume a new IT firm has created a programme to make cash transactions more accessible around the globe. It has been active in generating income as well as attracting venture capitalist interest.
However, it assumes it will need more capital to expand, about INR 30 crores , which it currently lacks. As a result, it would need to collect this money from outside sources.
The business talks to investment banks to see how much their stock could be worth on the open market, and the banks’ underwriters say INR 19 a share would be a reasonable IPO price, evaluating the business at just below INR 100 crores.
Process
The board of directors of the organization decides to list the firm ‘s shares and they apply for an initial public offering (IPO) in SEBI to release a number of shares worth half of the overall value, or INR 50 crores.
The business raises capital and becomes listed on a stock exchange where its shares can be openly traded with the new issue.
The business raised INR 50 crores from the new issue, significantly more than the INR 30 crores they projected they required for expansion. Since it did not list all of its shares, the corporation still owns a significant percentage of the business.
Types of Issues in the New Issue Market
There are 5 types of issues take place in the new issue market:
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Initial Public Offering (IPO)
A prospectus is issued by a corporation in this fashion to inform and attract the general public. In a prospectus, a corporation describes the purpose for which funds are being raised, the firm’s previous financial record, history, and future prospects.
The prospectus’ content informs the public about the firm’s risk and earning potential, allowing them to make an informed decision about whether or not to invest in it.
Through an IPO, a firm can reach out to a wide number of people and the general public. To raise cash from the general public, firms can use middlemen such as bankers, brokers, and underwriters.
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Offer for Sale (OFS)
New securities are issued to the general public via this approach, although not directly by the firm, but rather through an intermediary who purchases a large number of stocks from the firm.
Brokerage businesses are commonly used as intermediaries. As a result, the sale of stocks occurs in two stages: first, the corporation sells securities to middlemen at face value, and second, middlemen issue shares to the general public at a higher price in order to profit.
The corporation avoids the legalities and complexity of issuing stocks straight to the public using this strategy.
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Private Placements
In this strategy, the corporation sells shares to a facilitator at a specified price, & the facilitator then sells these stocks at a higher price to specified investors rather than the broader public.
The issuing firm prepares a prospectus to provide information about its goals and future prospects so that reputable clients opt to purchase the security through an adviser.
Institutions use this strategy to sell shares to specific clients, such as UTI, LIC, and General Insurance. The private placement approach saves money because the firm avoids paying underwriting costs, manager fees, agents’ commissions, and registering the firm ‘s name on the stock exchange.
Small & young businesses choose private placement because they cannot afford to seek funds through a public offering.
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Rights Issue
This is when fresh stocks are issued to current shareholders. It’s labeled a right issue because it’s the shareholders’ pre-emptive right to demand that the corporation provide them with the new issue before selling it to outsiders.
Every shareholder has the option of subscribing to new stocks in proportional to the number of shares he presently owns. Firms must issue a right issue under the Companies Act of 1956.
The stock exchange does not enable existing firms to go for a new issue without giving current shareholders preemptive rights since if a new issue is issued straight to new subscribers, existing equity shareholders may lose their share of capital and ownership of the organization, i.e., their equity will be diluted.
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Electronic Initial Public Offering
It is a novel technique of issuing stocks through the stock exchange’s on-line system. For the goal of receiving applications and placing orders, this firm must select registered brokers.
The firm issuing the security must seek to have its securities listed on any exchange other than the one where it previously sold its securities.
The manager manages the operations by coordinating them through numerous intermediates involved in the issue.
Summary
New Issue market comes with market Risks. If you are investing in this market you should carefully analyze the company before investing.
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FAQ About new issue market meaning
New issue market is compared with which market?
New issue market is compared with secondary markets.
Can a company only able to come up with fresh issue once?
no, they can come again if the size of the company is increased and sebi gives them the permission to do so.
who all can come up with new issues?
Running Business and governments both can come up with new issues.
Who gives permissions for new issues?
Securities and Exchange Board of India is the regulatory agency which gives approvals for new issues.
Where will the new issues got listed?
New issues get listed on the National stock exchange or Bombay Stock Exchange. They can be listed on both of them together as well.
