Roles

The primary market is defined by sales of securities for the first time. While there are various forms of the primary market, all transaction proceeds go back to the issuer. We’ve discussed initial public offerings (IPOs) in previous chapters, which is a type of primary market. After the issuer raises capital (money) from the primary market sale, the security is traded in the secondary market.

There are four key participants to be aware of when discussing the primary market:

• Issuers
• Underwriters
• Investors
• The SEC

Issuers are companies, organizations, or governments that raise capital (money) through selling securities. Underwriters, which are sometimes referred to as investment banks, are hired by issuers to market and facilitate the sale of securities. Investors purchase securities in the primary market. Last, the Securities and Exchange Commission (SEC) is responsible for overseeing the primary market and regulating the financial professionals participating in it.

From a small start-up company to the government, issuers come in all shapes and sizes. Issuers raise capital when a need is identified. Needs could range from expanding a business, hiring a significant amount of employees, or paying for deficit spending (like our government does). Real-world examples of issuers include:

• US Government
• City of Los Angeles
• Verizon
• Microsoft
• Visa

Issuers need help navigating the sale of securities. In most cases, issuers do not have the network or infrastructure in place to sell securities to investors. As you’ll learn in this chapter, selling new issues comes with many rules and responsibilities.

Underwriters are hired by issuers to help navigate the sale and marketing of securities to the public. Investment banking, also known as underwriting, can be a huge business. For example, Facebook’s underwriters made over $100 million during their IPO in 2012. Underwriters have many roles, ranging from general advice to actually selling the security. Real-world examples of underwriters include:

• Morgan Stanley
• JP Morgan
• Goldman Sachs

The underwriter of the IPO is not the only financial firm involved in the sale. When the issuer hires an underwriter, they’re really hiring a lead underwriter who will then form a group called the syndicate.

The syndicate is made up of several financial firms that will assist the lead underwriter with the sale. For their participation, the lead underwriter shares their underwriting fees with the members of the syndicate. The lead underwriter’s job is to serve as the point of contact for the issuer, manage the underwriting syndicate, and facilitate the sale of the issue to the public by leading the syndicate.

Securities sold in the primary market are sold to investors. Investors could be individuals (like you), financial institutions, or even a form of government. The regulations surrounding new issues were created to protect the investors from fraud and manipulation on behalf of issuers and underwriters.

When a new issue is offered in the primary market, it will likely be regulated by the SEC. Unless an exemption exists, new issues must be registered. Registration requires significant amounts of paperwork and fees, but the goal of registration is to confirm the issuer and underwriter are providing the public with enough information to make an informed investment decision. We’ll learn much more about this process later in this unit.