ASSIGNMENT 1

Submtted to:
Naharin Binte Rab
Senior Lecturer

Submitted By
Md.
Md.Ashfaq
AshfaqHossain
Hossain
ID: 2016-2-10-048
Fin335,Sec:02

FU
‘Corporations raise fund from primary market only’ -

I agree with this statement. The companies raise money in the primary market through securities
such as shares, debentures, loans and deposits, preference shares etc. Let us take a look the
various methods of how new securities are floated in the primary market.

1. Offer through Prospectus:

This is a method of public issue. It is also the most used method in the primary market to raise
funds. Here the company invites the investors (general members of the public) to invest in their
company via an advertisement also known as a prospectus.

After a prospectus is issued, the public subscribes to shares, debentures etc. As per the response,
shares are allotted to the public. If the subscriptions are very high, allotment will be done on
lottery or pro-rata basis.

2. Private Placement
Public offers are an expensive affair. The incidental costs of IPO’s tend to be very high. This is
why some companies prefer not to go down this route. They offer investment opportunities to a
select few individuals.

So the company will sell its shares to financial institutes, banks, insurance companies and some
select individuals. This will help them raise the funds efficiently, quickly and economically.
Such companies do not sell or offer their securities to the public at large.

3. Rights Issue
Generally, when a company is looking to expand or are in need of additional funds, they first
turn to their current investors. So the current shareholders are given an opportunity to further
invest in the company. They are given the “right” to buy new shares before the public is offered
the chance.

This allotment of new shares is done on pro-rata basis. If the shareholder chooses to execute his
right and buy the shares, he will be allotted the new shares. However, if the shareholder chooses
to let go of his rights issue, then these shares can be offered to the public.
4. IPO
It stands for Electronic Initial Public Offer. When a company wants to offer its shares to the
public it can now also do so online. An agreement is signed between the company and the
relevant stock exchange known as the e-IPO.

Facts behind the existence of secondary market:

Although companies are raising money from primary market and secondary market trading does
not lead to new capital raising by companies, but these markets provide an important
underpinning to the primary markets where new capital is raised. The ability to sell in the
secondary market enhances the liquidity of the securities making it more likely that the securities
will be bought when first issued. Trading in the secondary market also provides a pricing
benchmark for similar new securities issued in the primary market.

Moreover, when secondary offering happens when a company’s board of directors agrees to
increase the share float for the purpose of selling more equity. When the number of outstanding
shares increases, this causes dilution of per share earnings. The resulting influx of cash is helpful
in achieving the longer term goals of a company or it can be used to pay off debt or finance
expansion.
Also, the individual selling security is benefited from the trade. Secondary market promotes
safety and security in transactions. Also, secondary market drives the price like when a company
issue their shares for the first time in the primary market the price of those shares were initial and
not accurate may be but then the secondary market drives the price to its actual value and to its
perfect amount by buying and selling shares among the investors.

For example: when Dragon sweater first issued their shares in the market it was only 10 BDT
and today in secondary market it is about 30 BDT. Also, when RAK ceramics first issued their
shares in the market it was only 10 BDT and today in secondary market it is near about 40 BDT.

Thus by offering shares to public in secondary market company can raise more fund and can be
more beneficial to the companies after their initial public offering.