Primary Market — Methods of Raising Capital

The primary market, also called the new issue market, is that segment of the capital market in which securities are offered and sold to investors for the very first time, and in which the issuing company receives the sale proceeds directly. A company may raise capital in the primary market through several distinct methods, each suited to a different situation.

An Initial Public Offer (IPO) is the method by which a company that is not yet listed on any stock exchange offers its shares to the public for the very first time, in order to raise capital and, at the same time, to get its shares listed and freely tradable on a recognised stock exchange. An IPO is typically the route a growing private or closely-held company takes when it first wishes to access the wider investing public's savings, rather than continuing to depend on promoters, venture investors, or bank borrowing alone.

A Follow-on Public Offer (FPO) is, by contrast, an issue of additional shares made by a company that is already listed on a stock exchange, to the public at large, when it needs further capital after its shares are already trading in the market. The essential difference between the two is simply that an IPO is a company's first-ever public issue, while an FPO is a subsequent one made by an already-listed company.

A Rights Issue is an offer of new shares made by an already-listed company not to the public at large but specifically to its own existing shareholders, in proportion to the number of shares each already holds, and usually at a price somewhat below the prevailing market price. This method rests on the shareholder's pre-emptive right — the principle that existing shareholders should have the first opportunity to subscribe to new shares before they are offered to outsiders, so that a shareholder's proportionate ownership and voting power in the company is not diluted without that shareholder's own consent (a shareholder who does not wish to subscribe may typically renounce the rights entitlement in favour of someone else, or simply let it lapse). …