PROS AND CONS OF PRIMARY MARKET

Advantages of Primary Market        

One of the major advantages of the primary market is that here the corporations can raise money directly from the investors. This enables them to pay off debts, fund their operations, and expand their business. A few other advantages are,

1. Capital Infusion: Corporations can raise a sufficient amount of capital by issuing new shares in the primary market. This helps the company in expanding its business, research and development, debt repayment or taking other strategic initiatives.

2. Market Presence: A company can increase its visibility and credibility in the market by attracting investors, analysts, and media if the company goes public through an IPO.

3. Transparency and Fair Pricing: Due to regulations from SEBI, transactions in the primary market are transparent and hence are a secure medium of investment. Further, the pricing of the securities is decided by the underwriters considering several factors leading to a fair pricing.

4. Subject to Low Risk: Companies offering securities via the primary market are subject to cut down on risk due to diversification. Investors can reduce their risk by investing in multiple financial instruments across the market. Further, the primary market is not exposed to market fluctuations and hence, the potential market risk does not affect the price of the securities as the price is set by the underwriter.

Disadvantages of Primary Market        

The following are some of the disadvantages that a primary market can possess,

1. High Costs: The process of going public, especially through an IPO, can be expensive. Companies often incur significant underwriting and legal or regulatory fees including marketing expenses. This leads to a reduction of net proceedings from the issue.

2. Regulatory Obstacles: Companies going public must comply with extensive regulatory requirements, which can be time-consuming and may pose challenges. The SEBI has set out rules and regulations for going public which can be cumbersome and complicate the proceedings.

3. Dilution of Ownership: Existing shareholders may experience dilution of their ownership stake when new shares are issued in the primary market.

4. Risk of Over and Under Subscription: Small investors might lose out on share allocation if the shares are over-subscribed. Also, if the issue is not properly received in the market, then it might lead to under-subscription. Thus, both under and oversubscription are harmful to the issue.

5. Time-Consuming: The proceedings for issuing in the primary market is time-consuming as a company going for an IPO needs to initially hire an underwriter, then the underwriter would analyse and study the market and financials of the company and then decide on the further proceedings. This whole process takes a lot of time to finally raise the money from the market.