1. Primary Market: The Launching Pad for New Securities
The primary market acts as a platform for companies and governments to issue new securities for the first time. These securities can be stocks (representing ownership in a company) or bonds (representing debt issued by a company or government).
Issuers can raise capital through the primary market to fund various needs, such as expansion projects, debt repayment, or new investments. They have the flexibility to issue securities at their face value (explained below), at a premium (higher than face value), or at a discount (lower than face value).
These securities can be issued domestically (within the country) or internationally.
2. Face Value: The Starting Point of a Security
The face value, also known as par value, is the nominal value assigned to a security by the issuer. It represents the initial cost of the security, as stated on the certificate.
For stocks, the face value is usually a small amount (like ₹5 or ₹10) and doesn’t significantly impact the market price. A stock’s market price can fluctuate and be much higher than its face value (e.g., ₹100 or ₹1000).
For bonds, the face value typically represents the amount the holder receives when the bond matures. In India, government and corporate bonds often have a face value of ₹100. However, the actual price at which a bond trades depends on prevailing interest rates in the market.
3. Premium and Discount: Navigating the Price Spectrum
Securities typically have a face value in denominations of ₹5, ₹10, or ₹100.
- Premium: When a security is sold for more than its face value, it’s said to be issued at a premium. This is often the case for companies with strong financial performance or growth potential.
- Discount: Conversely, when a security is sold for less than its face value, it’s said to be issued at a discount. This might happen for companies facing financial difficulties or when interest rates rise (making existing bonds with lower interest rates less attractive).
By understanding these concepts, you’ll gain a better understanding of how securities are issued and traded in the primary market.