When we hear about Equity Capital Markets (ECM), one thing that naturally comes to mind is stock ownership and stock prices of various publicly listed companies. We can explain equity capital markets as a broad network of financial institutions, markets and channels that work in conjunction to help companies raise capital from the public. In this scenario, companies gather capital to advance business operations by issuing equities to either public or private investors. Any market that allows companies to obtain capital by issuing equity falls into the ECM category.
Equity capital market setup and functions
Before we jump deeper into the functions of an equity capital market, let’s understand the structure of this market. The equity capital market is divided into two segments, i.e., the primary equity market and the secondary equity market. The primary equity market is further divided into the private placement market and the primary public market. The secondary equity market is classified into stock exchanges and over-the-counter markets.
The equity capital market plays a key role in how securities are traded and investments are made. From marketing, distribution and allocation of issues to private placements and derivatives trading, there’s a lot that the equity capital market manages. Investment banks, venture capitalists, angel investors and private equity companies are the primary players in this market. ECM support services can help you participate in the equity capital market.
Types of equity capital market
Broadly, the equity capital market is categorised under two groups, i.e., the primary equity market and the secondary equity market. This distinction is made based on the type of equity being traded. Let’s dig deeper to find out more about this.
- Primary market
Primary equity markets allow companies to sell new stocks primary through Initial Public Offerings (IPOs). The companies that are going to be listed on stock exchanges raise equity capital from the primary market. This is divided into private placements of stocks and primary public market. Companies that are already listed can also issue new equity in the primary market through seasoned issues.
- Secondary market
Secondary equity markets are stock exchanges that facilitate the trading of equities already brought into the initial public offerings. Anyone can participate in the secondary market and buy stocks of different companies being publicly traded on various exchanges.
Instruments traded in the equity capital markets
The equity capital market also consists of markets for a private placement of equity to retail and institutional investors and warrants. It is important to note that the equity capital markets are not just limited to stock markets but encompass a wide range of financial activities and tools. These activities include private placements, derivatives trading, book building, and marketing of issues. ECM support services can help you understand these instruments better. Here are some of the commonly traded instruments in equity capital markets.
- Common shares
Common shares are the stocks of a business entity that represent a fraction of ownership in the company. Common shareholders are entitled to dividends and profits after the preferred shareholders and bondholders are paid. To calculate the earnings available to common shareholders, the preferred dividend amount is deducted from profit after tax. It is important to note that the common shareholders don’t have legal rights to claim a dividend.
- Preferred shares
Preferred shares are equity instruments that have some features of a common equity stock and some elements of a debenture. They offer a fixed rate of dividends from a company and have the first claim to a company’s income and assets after bondholders. It is important to note that the dividend on preferred shares is non-tax deductible.
- Private equity
Private equity refers to those equity investments which are made using private placements. It is usually raised by private limited companies and partnership firms that are not yet publicly listed. Most private equity funds are raised by start-up ventures or small and medium-sized firms. These firms seek private equity capital as they have limited access to bank funds because of their unproven track record. ECM support services from reliable firms can help you obtain private equity to expand your business operations.
- Global depository receipts
Global Depository Receipts (GDR) refer to receipts issued by financial institutions in developed nations against the stock of foreign enterprises. These are non-negotiable receipts and are primarily used to create a sense of security on a local exchange. It can also be freely traded like other security instruments.
Apart from the above instruments, futures, options, and swaps are also a part of instruments traded in equity capital markets.