Q.Explain any four methods of floatation of new issues in the primary market.
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Primary Market: Where Securities Are Born
Let's build this from the ground up — no jargon first, then the precise definition.
1. The Intuition: A Company Needs Money
Imagine you start a successful chai stall. Business is booming, and you want to open 10 more stalls across the city. But you don't have enough cash.
Two options:
- Loan from a bank (debt) — you pay interest.
- Sell a piece of your business to investors (equity) — they become part-owners.
When you decide to sell those "pieces" (shares) to the public for the first time, you are creating them. This act of creating and selling new securities happens in the Primary Market.
Think of it as the "factory" where financial instruments are manufactured.
The money goes directly from investors to the company (or government).
2. The Precise Definition
Primary Market is the segment of the capital market where new securities (shares, debentures, bonds) are issued for the first time directly by the issuer (company or government) to investors.
The issuer receives the funds raised.
Key features:
- New issue — security did not exist before.
- Direct flow of funds — investor → issuer.
- No trading — securities are not exchanged between investors here.
- Regulated by SEBI (in India) for transparency.
3. How It Works: The IPO Example
The most famous primary market event is an Initial Public Offering (IPO).
| Step | What happens |
|---|---|
| 1 | Company decides to go public (list on stock exchange). |
| 2 | Hires investment bankers (merchant bankers) to price the shares. |
| 3 | Issues a prospectus — a detailed document with financials, risks, and use of funds. |
| 4 | Investors apply for shares (bid). |
| 5 | Shares are allotted. |
| 6 | Company receives the money. |
After this, the shares start trading on the Secondary Market (stock exchange) — that's where you buy/sell existing shares.
4. Types of Issues in Primary Market
| Type | Description |
|---|---|
| IPO | First public sale of equity by a private company. |
| FPO (Follow-on Public Offer) | Already listed company issues more shares. |
| Rights Issue | Existing shareholders get first chance to buy new shares at a discount. |
| Private Placement | Securities sold to a select group (e.g., institutional investors), not the general public. |
| Bonds / Debentures | Government or company issues debt securities. |
5. Why It Matters (Exam Point of View)
- Primary Market = Source of fresh capital for companies and government. …
Four methods of floating new issues in the primary market: Offer through Prospectus, Offer for Sale, Private Placement, and Rights Issue.
OR: Four factors affecting dividend decisions: amount/stability of earnings, cash-flow position, growth opportunities, and legal/contractual …
New shares can be floated via Prospectus, Offer for Sale, Private Placement or Rights Issue. (OR: dividend decisions are shaped by earnings, cash flow, growth needs and legal constraints.)
Four methods of floatation of new issues in the primary market:
- Offer through Prospectus: the company invites the public directly to subscribe to its shares/debentures through a detailed document (prospectus) disclosing all relevant information.
- Offer for Sale: securities are first sold en bloc to intermediaries (issue houses/stockbrokers) at an agreed price, who then resell them to the investing public.
- Private Placement: the company sells securities directly to a select group of institutional investors or a small number of investors, rather than to the general public. …
Showing the 12 most recent of 15 on this concept.
- CBSE 2026Set 66/2/11 markMCQQ.In the ‘Primary Market’ prices of securities are determined by : (A) Management of the company (B) Demand and supply of the security (C) Employees of the company (D) Only demand for the security
›Reveal solutionSolution
In the primary market the issue price of a new security is fixed and decided by the management of the company (with its merchant bankers), not by demand and supply. Demand and supply determine prices only in the secondary market. The correct answer is (A).
When a company needs long-term funds, it can issue fresh securities — shares or debentures — to the public for the first time. The marketplace for such first-time issues is the primary market (also called the new issues market). A common point of confusion in CBSE Class 12 Business Studies is who decides the price at which these new securities are offered.
How pricing works in the primary market
In the primary market, the company raising the funds decides the price of its securities. The management, usually assisted by merchant bankers or lead managers, studies the company's financial position, its prospects and market sentiment, and then fixes the issue price (for example, the face value plus any premium). The investor either accepts that fixed price and applies, or does not — the investor cannot bid the price up or down the way buyers and sellers do on a stock exchange. In short, the price is determined by the company's management, not discovered through continuous trading.
How this differs from the secondary market
The secondary market (the stock exchange) is where securities that have already been issued are bought and sold among investors. Here no single company fixes the price; the price of a security changes continuously with the demand and supply of that security — more buyers than sellers push the price up, and vice versa. That is the market where demand and supply genuinely govern price.
Evaluating the options: …
- CBSE 2025Set ANNUAL1 markMCQQ............. deals in new issued shares. (A) Secondary market (B) Primary market (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Newly issued shares are dealt with in the primary market, where securities are sold to investors for the first time.
The primary market (also called the new-issue market) is the segment of the capital market in which a company issues new shares or debentures directly to investors to raise long-term funds. The secondary market, by contrast, only trades securities that already exist. Since the question is about shares being issued for the first time, the correct segment is the pr …
- CBSE 2024Set 66/1/11 markMCQQ.In the ___________ market, prices are determined and decided by the management of the company. (A) Primary (B) Secondary (C) Money (D) Stock
›Reveal solutionSolution
In the primary market, companies issue new securities directly to investors, and the issuing company's management sets the price. The answer is (A).
When a company needs to raise capital—whether for expansion, paying off debt, or funding new projects—it can issue fresh securities (shares or bonds) to the public. This first-time sale happens in what we call the primary market, and it's fundamentally different from the everyday buying and selling of existing securities.
The key insight is this: in the primary market, there is no pre-existing market price because the securities are brand new. The company, along with its investment bankers and underwriters, must decide what price to set for these securities. This is a deliberate, managed process involving valuation models, assessment of investor appetite, and strategic pricing to ensure the issue is fully subscribed while maximizing capital raised.
Let me walk through why each option fits or doesn't:
- Primary Market (A): This is where new securities are born. The company's management, working with merchant bankers and underwriters, determines the issue price through methods like book-building (where investor bids help discover the price within a range) or fixed-price offerings (where management simply announces the price). The proceeds from this sale go directly to the company. Because the company controls the issuance, it controls the pricing mechanism. …
- CBSE 2024Set MARCH1 markQ.For which type of security issue the expense is comparatively less?
›Reveal solutionSolution
A private placement (and rights issue) is comparatively less expensive.
When a company raises capital through a public issue it has to spend heavily on prospectus, advertisement, underwriting, brokerage and other formalities. In a private placement the securities are sold directly to a small selected group of investors (institutions, etc.), and in a rights issue they are offered to existing shareholders — both avoid the large public-issue co …
- CBSE 2024Set ANNUAL1 markMCQQ.New issued shares are dealt in (A) Secondary market (B) Primary market (C) Both Secondary and Primary markets (D) None of these
›Reveal solutionSolution
New (fresh) issues of shares are made in the primary market, also called the new issue market; already-issued shares are traded in the secondary market. The answer is (B).
This BSEB Inter / Bihar Class-12 Business Studies MCQ distinguishes the two segments of the capital market. The primary market, also known as the new issue market, is where a company issues securities for the first time — for example through an IPO — and raises fresh capital directly from investors.
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- CBSE 2023Set 66/1/11 markMCQQ.Adapting to a change in consumer preference towards online shopping, 'Fast-Service' started a grocery delivery app. It is a platform that ensures 10-minute deliveries of groceries. Because of this service, 'Fast-Service' earned huge profit within a year. It planned to expand its operations and decided to raise funds by directly issuing its securities to investors. The market through which 'Fast-Service' has decided to raise funds for its expansion is : (A) Money market (B) Primary market (C) Secondary market (D) Both Primary and Secondary markets
›Reveal solutionSolution
When a company issues new securities directly to investors to raise capital, it operates in the Primary Market. The answer is (B).
The financial system channels savings into productive investment through two broad market structures: the primary market and the secondary market. Understanding which market a company uses depends entirely on whether it is creating new capital or merely facilitating the transfer of existing securities.
Fast-Service wants to raise funds for expansion. This is the critical phrase. Raising funds means the company needs fresh capital—money that flows into the company's treasury to finance new projects, hire staff, build infrastructure, or scale operations. The only way a company can bring new money into its coffers is by issuing new securities (equity shares, bonds, debentures, etc.) and selling them to investors.
When securities are issued for the first time—whether it's an Initial Public Offering (IPO) or a subsequent issue like a Follow-on Public Offer (FPO) or a private placement—the transaction occurs in the Primary Market. Here, the company is the seller, and investors are the buyers. The money paid by investors goes directly to the company, creating new capital.
Contrast this with the Secondary Market (stock exchanges like NSE or BSE), where investors trade already-issued securities among themselves. If you buy shares of Fast-Service on the stock exchange after its IPO, your money goes to the previous shareholder, not to Fast-Service. The company receives no new funds from secondary market transactions; these trades merely change ownership.
The Money Market, on the other hand, deals with short-term debt instruments (Treasury bills, commercial paper, certificates of deposit) with maturities typically under one year. It's a liquidity management tool, not a venue for raising long-term expansion capital.
Let's apply this to Fast-Service:
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The company's objective: Fast-Service has earned profit and now wants to expand operations. Expansion requires capital—funds to open new warehouses, hire delivery personnel, invest in technology, enter new cities, etc.
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The method chosen: The problem states Fast-Service "decided to raise funds by directly issuing its securities to investors." The phrase "issuing securities" is the giveaway. Issuing means creating new financial instruments (shares or bonds) and selling them.
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Direct issuance = Primary Market: When a company issues securities directly to investors—whether through a public offer, rights issue, or private placement—it is operating in the Primary Market. The capital raised flows into the company's balance sheet. …
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- CBSE 2023Set 66/2/11 markMCQQ.Which of the following statements is Not true for primary market ? (A) There is no fixed Geographical location. (B) Only buying of securities takes place, securities cannot be sold there. (C) Prices are determined by demand and supply of the security. (D) It directly promotes capital formation.
›Reveal solutionSolution
The primary market is where new securities are issued for the first time, directly raising capital for the issuer. The statement that is not true is (C): prices are not determined by demand and supply in the primary market — they are fixed by the issuer and underwriter before the issue opens.
The primary market is the new issue market. Think of it as the factory door where securities are born. Companies, governments, or other entities issue shares, bonds, or debentures for the first time to raise fresh capital. Investors buy these securities directly from the issuer (or through an underwriter). This is fundamentally different from the secondary market (like a stock exchange), where already-issued securities are traded among investors.
Let’s examine each statement carefully.
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Statement (A): "There is no fixed Geographical location."
This is true. The primary market is not a physical place like a stock exchange building. It operates through a network of intermediaries — merchant bankers, underwriters, registrars, and online platforms. An IPO, for example, can be subscribed to from anywhere via a bank or trading app. There is no single "hall" where all primary market activity happens.
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Statement (B): "Only buying of securities takes place, securities cannot be sold there."
This is true. In the primary market, the issuer sells new securities to investors. Investors can only buy these new securities; they cannot sell them back to the issuer or to other investors in this market. Selling happens later, in the secondary market. So the primary market is a one-way street: issuer → investor.
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Statement (C): "Prices are determined by demand and supply of the security."
This is not true for the primary market. Here’s the key distinction:
- In the secondary market, prices fluctuate based on real-time demand and supply among investors.
- In the primary market, the price of a new issue (e.g., the IPO price) is fixed in advance by the issuer and the underwriter, based on factors like the company’s valuation, book-building process, or a fixed price offer. Even in a book-built issue, where investors bid within a price band, the final issue price is set by the company before the allotment — it is not a continuous demand-supply equilibrium like in secondary trading. The price is predetermined, not discovered by open market trading. …
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- CBSE 2023Set ANNUAL1 markQ.Express each of the following in one word/term:(iii) The return a debenture holder gets regularly.
›Reveal solutionSolution
The regular return on a debenture is Interest.
A debenture represents borrowed capital (a loan to the company), so the debenture holder is a creditor, not a shareholder. The company is contractually bound to pay a fixed rate of return on debentures whether or not it earns profit, and that return is called interest.
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- CBSE 2023Set ANNUAL1 markQ.Answer each of the following in one sentence:(iv) What is meant by new issue market?
›Reveal solutionSolution
The new issue market means the primary market, where new securities are issued to the public for the first time.
In the primary (new issue) market, companies, governments or institutions raise fresh long-term funds by issuing new securities directly to investors — through public issues (IPO/FPO), rights issues or private placements. The money flows straight from investors to the issuing company, creating new capital.
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- CBSE 2023Set ANNUAL1 markQ.Correct the underlined portion of the following sentence:(ix) Retained profit is concerned as borrowed funds. [Underlined: borrowed]
›Reveal solutionSolution
Correct "borrowed" to "owned": retained profit is an owned, internal source of finance.
Retained profit (ploughing back of profits) is the portion of a company's earnings kept in the business instead of being distributed as dividend. Because it comes from the firm's own profits and carries no repayment obligation or fixed interest, it is classified as owned …
- CBSE 2023Set ANNUAL1 markMCQQ.Which market is associated with new issues ? (A) Primary (B) Secondary (C) Wholesale (D) None of these
›Reveal solutionSolution
New issues of securities are dealt with in the primary market.
The primary market (new-issue market) is where a company raises fresh funds by issuing new shares or debentures directly to investors for the first time, for example through a public issue. The secondary market, by contrast, only deals in already-issued securiti …
- CBSE 2023Set ANNUAL1 markMCQQ.Type(s) of capital market is/are (A) Primary Market (B) Secondary Market (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
The capital market is divided into the primary market and the secondary market, so the answer that covers both — option (C) — is correct.
The capital market is the market for medium- and long-term funds (shares, debentures, bonds). It has two segments. The primary market (new issue market) is where a company raises fresh capital by issuing securities to investors for the first time, for example through an IPO. The secondary market (the stock exchange) is where investors buy and sell securities that have already been issued, giving them liquidity.
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