Kembaraxtra-Islamic Finance-Islamic Capital Market- Function of the Primary Market

• Investors who invest in equities do so by accepting an assumed level of risk.
• The primary equity market is economically designed to channel surplus funds into productive investments.
• Funds held by investors are redirected to companies that require capital for business expansion and productive activities.
• The price at which securities are issued reflects the estimated risk associated with the investment.
• There is a direct relationship between perceived risk and expected return in the primary market.
• Higher risk is associated with higher expected returns, while lower risk corresponds to lower expected returns.
• The primary market ensures that issued securities are priced in a manner consistent with their risk profile.
• The issue price set in the primary market plays a crucial role in ensuring market confidence and investment participation.
• The functioning of the primary market simultaneously establishes the need for secondary markets.
• Primary and secondary markets are therefore intertwined and interdependent.


Explanation of Primary Markets

• Corporates are the original issuers of shares or bonds in the primary market.
• Corporates approach banks to facilitate the issuance of securities.
• Banks operate on the sell side, acting as underwriters and intermediaries.
• Banks establish contacts between corporates and institutional investors.
• Institutions, such as fund managers, operate on the buy side of the market.
• Institutional investors pool funds from individual investors.
• Individual investors indirectly participate in the primary market through institutions or directly through subscriptions.
• Capital flows from investors to corporates through banks and institutions.
• Securities such as shares or bonds flow from corporates to investors.
• This flow ensures capital formation for companies and investment opportunities for investors.


Relationship Between Primary and Secondary Markets

• Companies list their shares on stock exchanges to obtain permanent capital.
• Funds raised through primary markets are used for long-term investments such as production facilities and equipment.
• These investments aim to generate returns for the company and its shareholders.
• Without secondary markets, primary market capital would become illiquid.
• Secondary markets provide liquidity and an exit mechanism for investors.
• The existence of secondary markets makes primary market investments more attractive.
• Secondary markets assist in correct price discovery of securities.
• Professional institutional investors play a dominant role in pricing efficiency.
• Smaller investors rely on institutional investors to maintain pricing discipline in the market.
• Investors can only trade shares after the company completes its IPO and sets the issue price.
• Trading activities in primary markets differ fundamentally from those in secondary markets.