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Primary Markets

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New issues of securities are called primary offerings. Stock purchases through primary offerings are called primary market transactions. The company uses the funds raised by the sale of securities in primary offerings to expand production, enter new markets, further research, or enhance other aspects of the firm's operations. After this, whenever the securities are bought or sold it is in the secondary market.

If the company has never before offered a particular type of security to the public it is called an unseasoned offering or initial public offering (IPO). If they issue additional securities that are similar to those trading in the secondary market, it is known as a seasoned offering. For example, Wal-Mart "went public" in 1978 when it made its first IPO of common stock that immediately started trading on the New York Stock Exchange under the ticker symbol "WMT." This was an unseasoned offering at the time. When WMT issued more shares of the same common stock it was called a seasoned offering because it was just more of the same stock being released into the market.

A ticker symbol, also simply called a symbol, is a system of letters used to uniquely identify a stock or mutual fund. Symbols with up to three letters are used for stocks which are listed and traded on an exchange. Symbols with four letters are used for most Nasdaq stocks. Symbols with five letters are used for Nasdaq stocks with multiple issues of common stock. Symbols with five letters ending in X are used for mutual funds.

Companies raise money quickly when the stock prices rise because they can sell seasoned offerings to the public at a price higher than the unseasoned offering. They don't have to pay interest to bondholders or loan payments to banks when they raise money this way. Alternatively, as the company's stock drops, it becomes more expensive for the company to capitalize with equity and they have to use more debt, either bonds or bank financing. New issues of equity securities may be sold directly to investors by the issuing corporation, but are usually distributed by an investment banker in an underwritten offering, a private placement, a rights offering, or a shelf registration.

The most common distribution method is an underwritten offering in which the investment banker purchases the securities from the firm at a guaranteed amount and then resells the equity securities to public investors for a greater amount. The difference is called the underwriter's spread, which compensates the investment banker for the expenses and risks involved in the offering.

Also, some equity securities are distributed through private placements in which the investment banker acts only as the company's agent and receives a commission for placing equity securities with investors.

A company will occasionally place equity securities with its existing shareholders. In a rights offering, a company's existing stockholders are given the rights to purchase additional shares at a slightly below-market price in proportion to their current ownership in the company.

An important innovation in the sale of securities is shelf registration. Shelf registration permits a corporation to register a large quantity of securities and sell them over time, rather than all at once. The issuer is able to save time and money through a single registration. In addition, these securities can be brought to market with little notice, thereby providing the issuer with maximum flexibility in timing an issue to take advantage of favorable market conditions.