{"id":21747,"date":"2022-12-30T09:32:00","date_gmt":"2022-12-30T09:32:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=21747"},"modified":"2023-02-08T09:34:25","modified_gmt":"2023-02-08T09:34:25","slug":"equity-capital-market","status":"publish","type":"post","link":"https:\/\/businessyield.com\/finance-accounting\/equity-capital-market\/","title":{"rendered":"Equity Capital Market (ECM): Detailed Guide with Example","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

When you hear the words “Equity Capital Market (ECM),” you might think of initial public offerings (IPOs)<\/a> and companies raising billions of dollars in massive stock-market<\/a> debuts.
But the group is about much more than setting records and creating headlines.
So, ECM groups, like other capital markets teams within banks, are a hybrid of investment banking and sales and trading. <\/p>\n\n\n\n

What is an Equity Capital Market?<\/span><\/h2>\n\n\n\n

The equity capital market is a subset of the larger capital market in which financial institutions<\/a> and businesses interact to exchange financial instruments and raise capital for businesses. Equity capital markets are riskier than debt capital markets, but they also have the potential for bigger profits.<\/p>\n\n\n\n

Consider the following example.<\/p>\n\n\n\n

Example<\/span><\/h3>\n\n\n\n

Company X wishes to raise equity capital by issuing 10,000 new shares at $23.12 per share. The corporation offers the new shares on the stock exchange, and investors buy them for a total of $10,000 x $23.12 = $231,200. Investors get ownership in the company by purchasing the stocks, which gives them voting rights in the firm’s decision-making as well as a claim right on the firm’s future earnings.<\/p>\n\n\n\n

Company X raises funds to fund its activities through the stock market. Investors can keep the shares or sell them on the stock exchange if the price climbs above $23.12, resulting in a profit.<\/p>\n\n\n\n

\"equity<\/a>
Source: Slideshare (An Introduction to Equity Capital Markets)<\/em><\/figcaption><\/figure>\n\n\n\n

Instruments Traded in the Equity capital Market<\/span><\/h2>\n\n\n\n

Equity capital is obtained by exchanging a portion of a claim\/right to a company’s assets for money. Thus, the worth of a company’s equity capital is the value of its existing assets and business. The equity capital market trades the following instruments<\/a>:<\/p>\n\n\n\n

#1. Common Stock<\/span><\/h3>\n\n\n\n

Common stock shares indicate ownership capital, and common stockholders get dividends from the company’s profits. The common shareholders have a vested interest in the company’s earnings and assets. So, they are only entitled to a portion of the company’s revenues after the preferred shareholders and bondholders have been paid.<\/p>\n\n\n\n

#2. Preferred Stock<\/span><\/h3>\n\n\n\n

Preferred shares are hybrid security since they have characteristics of both debentures and common equity capital market. They are similar to debentures in that they have a fixed\/stated dividend rate, a claim to the company’s revenue and assets before equity, no claim to the company’s residual income\/assets, and no voting rights.<\/p>\n\n\n\n

Preferred dividends, like common equity dividends, are not tax-deductible. Irredeemable preferred shares, redeemable preferred shares, cumulative preferred shares, non-cumulative preferred shares, participating preferred shares, convertible preferred shares, and stepped preferred shares are the many types of preferred shares.<\/p>\n\n\n\n

#3. Private Equity <\/span><\/h3>\n\n\n\n

This refers to equity investments made through private placements<\/a>. Private limited companies and partnerships raise it since they cannot trade their shares publicly. Typically, start-up and\/or small\/medium-sized businesses raise funding from institutional investors and\/or wealthy individuals through this channel because:<\/p>\n\n\n\n