Primary Market

Most public primary issues run through an investment bank acting as underwriter. Under a firm commitment (bought deal) the bank purchases the entire issue at a negotiated price and resells it, absorbing the risk of unsold inventory; its compensation is the gross spread, the difference between the price paid to the issuer and the price offered to investors. Under a best-efforts arrangement the bank acts only as agent and takes no inventory risk, so the issuer bears the placement risk.

Pricing is normally set through book building: the syndicate publishes an indicative range, collects indications of demand and price sensitivity from institutional accounts, then fixes the offer price and allocates shares at its discretion. Many deals include an over-allotment (greenshoe) option letting the syndicate sell additional shares and stabilise the aftermarket. A fixed-price offer, by contrast, sets terms before demand is known.

A rights issue offers existing shareholders the entitlement to subscribe new shares, usually at a discount, in proportion to current holdings. Because the subscription price sits below market, the share price mechanically falls to a theoretical ex-rights value: take the market value of the existing shares plus the cash raised from the new shares, then divide by the total share count after issue. A shareholder who takes up the rights in full suffers no economic loss; one who lets them lapse is diluted, which is why the rights themselves usually trade separately.

Private placements sell unregistered securities directly to a small group of qualified institutions, saving disclosure cost and time but reducing liquidity and typically requiring a yield or price concession. Shelf registration lets an established issuer pre-register securities and then draw down tranches when market conditions suit.

Sovereign debt is overwhelmingly distributed by auction. In a single-price (Dutch) auction all successful bidders pay the same clearing yield, the lowest yield at which the issue is fully subscribed; in a multiple-price auction each winning bidder pays its own bid, so aggressive bidders face the winner's curse. Non-competitive bids accept whatever price the auction produces in exchange for guaranteed allocation. Auction statistics such as the bid-to-cover ratio are read as demand indicators.

Equity issuers can also bypass underwriters. A direct listing admits existing shares to an exchange without raising new capital, and an accelerated bookbuild places a block with institutions overnight. On financial statements, primary issuance appears in cash flow from financing and in the equity section as share capital and share premium; a secondary sale by an existing holder appears nowhere in the issuer's accounts.

Expect classification questions first: given a described transaction, identify whether capital reached the issuer, whether the securities existed previously, and therefore which market the trade belongs to. Be able to separate a seasoned equity offering, which creates new shares, from a secondary offering of existing shares by an insider or state holder, and to recognise that both are primary market events even though only one raises new capital for the company.

You should also distinguish firm commitment from best-efforts underwriting by who bears placement risk, explain why book building can produce a deliberate underpricing that shows up as a first-day price jump, compute a theoretical ex-rights price, and state the pricing difference between single-price and multiple-price auctions.