Understanding the Primary Market: A Type of Market for Public Investors to Buy Promising Securities at an IPO

When you dive into the world of stock investing, you may have only purchased securities that have been issued for a long time on the secondary market. The value of these securities generally fluctuates depending on the performance of the issuing company and the interest of investors.

However, did you know that there is a type of market that trades securities that have just been launched to the public for the first time? This type of market is known as the primary market, and it is an important capital market category for stock investors to understand. Securities traded to the public for the first time, known as an initial public offering (IPO), often have promising profit potential.

Understanding the Primary Market: A Type of Market for Public Investors to Buy Promising Securities at an IPO

To understand more about the primary market, its transaction flow, and examples, see the following explanation.

Understanding the Primary Market

According to the Financial Services Authority (OJK), the primary market is a type of capital market where securities or effects are first traded to investors before being listed on the Stock Exchange. The offering period for shares on the primary market is when securities or effects are offered to investors by an Underwriter via a Broker Dealer or Securities Trading Intermediary as the securities selling agent. This process is commonly known as an IPO, or Initial Public Offering.

When offered on the primary market, shares have a fixed price because the company has determined the quantity and price before offering them to investors. Because of this fixed quantity, not all investors will be able to obtain the shares offered on the primary market that they desire.

It's important to understand that investor demand for shares offered on the primary market may not be met when there is oversubscription or excess demand. For example, suppose the initial issue of 100 million shares on the primary market is for a total of 150 million shares, while investor demand for those shares reaches 50 million shares.

In this situation, there is an excess demand for shares of 50 million shares. So, once the shares have been issued, some investors don't receive the desired number of shares they ordered. Naturally, the company will return or refund the excess funds to the investor in full.

Transaction Flow in the Primary Market

Unlike the secondary market, shares traded on the primary market must go through a specific transaction flow that is important for both the issuing company and investors to understand. For further clarity, the transaction flow on the primary market is outlined below.

Investors complete a Share Purchase Order Form (FPPS) and deposit funds into a Customer Fund Account (RDN) at the securities company.

Investors must then submit the FPPS, along with proof of deposit and personal identification information.

The securities company that has received the FPPS will submit it to the underwriter, who will then forward it to the Securities Administration Bureau (BAE) to obtain the share allocation.

When conducting an IPO on the primary market, the company is required to disclose the offering price, quantity, offering period, and various other important information. This announcement can be made through national newspapers, the company's official website, or in the form of a prospectus.

Examples of Securities Transactions in the Primary Market

To better understand the primary market, you can consider the following examples of securities transactions in that market.

Assume Company A conducts an IPO in 2024. The company is known as a leader in its industry and has promising appeal among investors. Because expectations for the company's initial offering are high, many investors believe its stock price will skyrocket rapidly in the secondary market.

With such high interest, Company A's stock offering in the primary market is a resounding success and is completely purchased by investors. If oversubscribed, the company can issue refunds or issue additional shares to meet market demand.

On the other hand, if the stock offering in the primary market falls short of expectations and attracts insufficient interest, the situation is called undersubscription. This occurs when a company's stock offering in the primary market fails to meet its target. In this situation, the company can still obtain the funding it needs because the remaining unsold shares will be purchased by the underwriter.

Buying Shares on the Primary Market Has a Special Appeal for Investors

That explains the primary market and its transaction process. Offering shares to the public for the first time, buying shares on the primary market has a special appeal for investors because it offers the potential for promising capital gains when the shares are listed on the stock exchange. However, it's important to also consider the profile and potential of the issuing company to lock in returns from the securities offered on the primary market when investing.