1. Classify the following transactions as taking place in the primary or secondary markets: ( LG 1-1 )

a. IBM issues $200 million of new common stock.

b. The New Company issues $50 million of common stock in an IPO.

c. IBM sells $5 million of GM preferred stock out of its marketable securities portfolio.

d. The Magellan Fund buys $100 million of previously issued IBM bonds.

e. Prudential Insurance Co. sells $10 million of GM common stock.

( LG 1-1)

primary markets

Markets in which corporations raise funds through new issues of securities.

Primary Markets versus Secondary Markets

Primary Markets. Primary markets are markets in which users of funds (e.g., corporations) raise funds through new issues of financial instruments, such as stocks and bonds. Table 1–2 lists data on primary market sales of securities from 2000 through 2010. The fund users have new projects or expanded production needs, but do not have sufficient internally generated funds (such as retained earnings) to support these needs. Thus, the fund users issue securities in the external primary markets to raise additional funds. New issues of financial instruments are sold to the initial suppliers of funds (e.g., households) in exchange for funds (money) that the issuer or user of funds needs. 1 Most primary market transactions in the United States are arranged through financial institutions called investment banks—for example, Morgan Stanley or Bank of America Merril Lynch—that serve as intermediaries between the issuing corporations (fund users) and investors (fund suppliers). For these public offerings, the investment bank provides the securities issuer (the funds user) with advice on the securities issue (such as the offer price and number of securities to issue) and attracts the initial public purchasers of the securities for the funds user. By issuing primary market securities with the help of an investment bank, the funds user saves the risk and cost of creating a market for its securities on its own (see discussion below). Figure 1–1 illustrates a time line for the primary market exchange of funds for a new issue of corporate bonds or equity. We discuss this process in detail in Chapters 6 and 8