Question

Discuss the different types of risks which affect the overall performance of primary markets?

(please I need 300 words)

Answer 1

Market risk is the risk to the stocks of a company losing its value due to certain economic changes or downturns. Primary market refers to the Initial Public offerings of companies. Primary markets are risky to invest as the companies are new and small and have an unpredictable business.Primary markets create securities and there ar certain risks associated with primary markets and are as follows:

1. They have limited information and regulatory compliance oversight.

Since the number of investors are less in number, there have limited regulations. There is little information known about the company going for IPO. It is also exposed to higher market risks which are difficult to ascertain at this level.

2. There is no previous trading history to track or to give judgement.

Since primary markets deal with the first public offerings of companies, it is difficult to predict or analyze the stocks as there is no historical component in it. All stocks are exposed to some types of risks. The risk factor associated with IPOs is difficult to predict.

3. Business model is not reliable or cannot be trusted initially.

The business model might be one which can change the industry but at the same time there is also high risk of failure due to non-adaptability. They might be an eye catcher for the investors but since they cannot predict the risk factor, there is huge risk in investing.

4. They have an experience of small projects.

The investment raised through IPOs should be invested in large projects and expansion. Promoters can get carried away by the initial performance of the business and act accordingly but the risk part cannot be ignored it will bring to the investments.