What is the primary function of a primary market in finance?

The primary market serves a crucial role in the financial system by providing a platform where new securities are issued and sold to investors for the first time. This is where companies, governments, and other entities raise capital by offering shares, bonds, or other financial instruments directly to investors. In this context, it allows issuers to obtain the necessary funding to invest in projects, expand operations, or meet other financial needs.

The process typically involves an underwriter, which helps determine the pricing of the securities and facilitates the sale. Investors purchasing in the primary market are essentially buying the securities directly from the issuer, creating new financial instruments that have not been previously traded. This distinct function differentiates the primary market from the secondary market, where existing securities are traded among investors rather than being created anew.

In summary, the primary market is where new securities are created and sold, serving as an essential mechanism for capital formation in the economy.