How Firms Issue Securities

primary market

Market for new issues of securities.

secondary market

Market for already-existing securities.

initial public offering (IPO)

First sale of stock by a formerly private company.

underwriters

Underwriters purchase securities from the issuing company and resell them.

prospectus

A description of the firm and the security it is issuing.

When firms need to raise capital they may choose to sell or float securities. These new issues of stocks, bonds, or other securities typically are marketed to the public by investment bankers in what is called the primary market. Trading of already-issued securities among investors occurs in the secondary market.

There are two types of primary market issues of common stock. Initial public offerings, or IPOs, are stocks issued by a formerly privately owned company that is going public, that is, selling stock to the public for the first time. Seasoned new issues are offered by companies that already have floated equity. For example, a sale by IBM of new shares of stock would constitute a seasoned new issue.

In the case of bonds, we also distinguish between two types of primary market issues, a public offering and a private placement. The former refers to an issue of bonds sold to the general investing public that can then be traded on the secondary market. The latter refers to an issue that usually is sold to one or a few institutional investors and is generally held to maturity.

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