MARKETS STOCK MARKETS

Equity Capital Market (ECM)

By ADAM HAYES Updated November 11, 2021

Reviewed by CIERRA MURRY

What Is the Equity Capital Market (ECM)?

The equity capital market (ECM) refers to the arena where financial institutions
help companies raise equity capital and where stocks are traded. It consists of
the primary market for private placements, initial public offerings (IPOs), and
warrants; and the secondary market, where existing shares are sold, as well as
futures, options, and other listed securities are traded.

KEY TAKEAWAYS

• Equity Capital Markets (ECM) refers to a broad network of financial

institutions, channels, and markets that together assist companies to
raise capital.

• Equity capital is raised by issuing shares in the company, publicly or

privately, and is used to fund the expansion of the business.

• Primary equity markets refer to raising money from private placement

and mainly involves OTC markets.

• Secondary equity markets involve stock exchanges and are the primary
venue for public investment in corporate equity.

• ECM activities include bringing shares to IPO and secondary offerings.

Related Terms
What Is a Primary Market?
A primary market is a market that issues new securities on an exchange, facilitated by
underwriting groups and consistingCLICK TO PLAY
of investment banks. more

What Is Capital?
1:23
Capital is a financial asset that usually comes with a cost. Here we discuss the four main
types of capital: debt, equity, working, and trading. more
Equity Capital Market

Financial Markets
Understanding Equity
Financial markets refer broadly Capital Markets
to any marketplace (ECMs)
where the trading of securities occurs,
including
The equitythecapital
stock market
marketand bondismarkets,
(ECM) broaderamong
than others.
just themore
stock market because it
covers a wider range of financial instruments and activities. These include the
How Equity Financing Works
marketing and distribution and allocation of issues, initial public offerings
Companies seek equity financing from investors to finance short or long-term needs by
(IPOs), private
selling an placements,
ownership derivatives
stake in the trading,
form of shares. and book building. The main
more
participants in the ECM are investment banks, broker-dealers, retail investors,
Privatecapitalists,
venture Equity Definition
private equity firms, and angel investors.
Private equity is a non-publicly traded source of capital from investors who seek to invest
or acquire equity ownership in a company. more
Together with the bond market, the ECM channels money provided by savers
and depository institutions to investors. As part of the capital markets, the ECM,
Learn About Secondary Offerings
leads, in theory, to the efficient allocation of resources within a market
A secondary offering is the sale of new or closely held shares of a company that has
economy.
already made an initial public offering (IPO). more

RelatedEquity
Primary Articles
Market
The primary equity market, where companies issue new securities, is divided
Three business CORPORATE FINANCE & ACCOUNTING
into a private placementHowmarket, andaaCompany
Should primary public market.Capital?
Be Raising In the private
colleagues
placement market, companies raise private equity through unquoted shares
planning together
that are sold to investors directly. In the primary public market, private
in a meeting
companies can go public through IPOs, and listed companies can issue new
equity through seasoned issues.
Hundred dollar bills MARKETS
wrapped Primary vs. Secondary Capital Markets: What's
Tip: inPrivate
chainsequity firms may use both cash and debt in their
the Difference?
investment (such as in a leveraged buyout), whereas venture capital
firms typically deal only with equity investments. 

Secondary
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analyzing
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chartsmarket,
secondary
do share capital and paid-up capital
where no new capital is created, is what most people
information differ?
typically think of as the "stock market”. It is where existing shares are bought
and sold, and consists of stock exchanges and over-the-counter (OTC) markets,
where a network of dealers trade stocks without an exchange acting as an
intermediary. INVESTING
Getting to Know the Stock Exchanges
Advantages and Disadvantages of Raising Capital in Equity
Markets
Raising capital through equity markets offers several advantages for
companies.
Interactive Brokers INVESTING
War Room A Look at Primary and Secondary Markets
The first one is a lower debt to equity ratio. Companies will not need to access
debt markets with expensive interest rates to finance future growth. Equity
markets are also relatively more flexible and have a greater variety of financing
options for growth as compared to debt markets. In some instances, especially
MARKETS
in private placement, equity
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vs.help entrepreneurs
Stock and company
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founders bring in experience and oversight from senior colleagues. This will
Difference?
help companies expand their business to new markets and products or provide
needed counsel.

But there are also problems with raising capital in equity markets. For example,
the route to a public offering can be an expensive and time-consuming one.
Numerous actors are involved in the process, resulting in a multiplication of
costs and time required to bring a company to market.

Added to this is the constant scrutiny. While equity market investors are more
tolerant of risk as compared to their debt market counterparts, they are also
focused on returns. As such, investors impatient with a company that has
consistently produced negative returns may abandon it, leading to a sharp drop
in its valuation.

Equity Capital FAQs

What Is Equity Capital and Debt Capital?
Companies seek to raise capital in order to finance their operations and grow.
Equity funding involves exchanging shares of a company's residual ownership
in return for capital. Debt funding instead relies on borrowing, where lenders
are repaid principal and interest without receiving any ownership claim. In
general, equity capital is more expensive and has fewer tax benefits than debt
capital, but also comes with a great deal of operational freedom and less
liability in the case that business fails.

How Is Equity Capital Calculated?

The equity of a company, or shareholders' equity, is the net difference between
a company's total assets and its total liabilities. When a company has publicly-
traded stock, the value of its market capitalization can be calculated as the
share price times the number of shares outstanding.

What Are the Types of Equity Capital?

Equity can be categorized along several dimensions. Private equity differs from
publicly-traded shares, where the former is placed via primary markets and the
latter on secondary markets. Common stock is the most ubiquitous form of
equity, but companies may also issue different share classes including
allocations to preferred stock.

What Is the Difference Between Capital and Equity?

Capital is any resource, including cash, that a company possesses and uses for
productive purposes. Equity is but one form of capital.

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