If you own a company that is looking to get an initial public offering (IPO), you might need to raise equity capital from financial institutions. However, you can do that through equity capital markets, which are broader than the stock market. Learn how equity capital markets work and what ECM groups do.
A financial advisor can help you create a financial plan for your investing needs and goals.
What Are Equity Capital Markets?
Equity capital markets (ECM) are where companies raise capital with the help of financial institutions.
As mentioned earlier, the ECM is broader than the stock market and covers more activities and financial instruments. For example, ECM helps get money from savers and banks to investors, much like the bond market. As a result, it plays a key role in the greater allocation of resources in a market economy.
Equity Capital Markets Structure
There are two markets within the ECM: the primary market and the secondary market.
The primary market is made up of:
- Private placements
- IPO distribution
- Warrants
- Book building
The secondary market consists of:
- Futures, options, and swap trades
- Existing shares that are sold
Within the primary market are two entities: the private placement market and the primary public market. However, the secondary market doesn’t raise capital.
| Private Placement Market | Primary Public Market |
| Companies raise equity through private, unquoted shares that are directly sold to investors. | Private companies go public through IPOs; Listed companies can issue new equity through additional securities. |
The secondary market is more like the traditional stock market. Similarly, shares are bought and sold, dealers trade stocks, and there are also over-the-counter (OTC) markets.
The people who participate most frequently in ECM are:
- Venture capitalists
- Private equity firms
- Angel investors
- Investment banks
- Retail investors
- Broker-dealers
- Securities firms
What Do ECM Groups Do?
In order for private companies to go public through IPOs and structure purchases, there need to be people who handle these transactions. Those people belong to ECM groups.
Some groups have different specialties. For instance, they tend to focus on specific types of companies that fit a niche, rather than a broad spectrum of interests. As a result, specialties include energy, the environment, or even government entities. But other groups don’t have a particular focus and instead are general in their coverage. However, some firms or banks have different divisions that have a specific focus but are under the same general investment banking branch.
ECM works closely with debt capital markets (DCM), and are under the same umbrella of investment banking. Meanwhile, since ECM and DCM groups work together, banks tend to have them near the same division.
You might be familiar with some investment banks already. any of them have other services for regular investors and bankers. For example, some of the most noteworthy investment banks include:
- Bank of America/Merrill Lynch
- Morgan Stanley
- Goldman Sachs
- Barclays Investment Bank
- Citigroup
- Wells Fargo
- JPMorgan Chase
- Deutsche Bank
- HSBC
However, if you’re looking for an ECM professional at those banks, they would:
- Handle origination and execution on products
- Understand market strategies and terms
- Provide financial solutions and products to companies
ECM professionals will help structure deals, research new deals, or work on presentations for potential clients. Different ECM workers include analysts, strategists, and officers. Meanwhile, one-on-one investing functions as it would with an individual. However, this would be between a company that’s raising equity or going public.
ECM groups aren’t limited to the United States. For instance, many investment banking companies, like Bank of America, HSBC, and others, work worldwide with a variety of different companies.
Bottom Line
If you have a company looking to raise capital, go through an initial public offering, or recruit investors, you’ll want to find an ECM group. Through an ECM group — whether a specific firm or division in a larger investment bank — you’ll be set up to find a way to get the money you need or go public. However, not all companies operate or raise money in the same way. As a result, you’ll want to find a company that’s successful. But is also should prioritize your needs.
Tips for Investing
- If you’re unsure about where to start on your investment track, consider talking to a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- There is such a thing as investing too late, especially when it comes to your retirement. However, if you’ve been holding back on retirement investing, use the investment calculator to see where you stand. You’ll be able to see how much your investments will earn you over the course of your investment journey, especially if you plan to cash out sooner rather than later. Your monthly and total contributions are important to your overall growth, so if you aren’t putting money towards your investments — or haven’t done much investing at all — you might want to start.
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