What Does Equity Capital Market (ECM) Mean?
An equity capital market (ECM) is a market that acts as a bridge between organizations that need money and investors who are willing to invest in it with equity. In other words, organizations raise capital through equity in this market.
There are two types of equity markets: the primary market and the secondary market. The primary market deals with IPOs. The secondary equity market deals with the buying and selling of existing shares including futures, options and swaps.
Divestopedia Explains Equity Capital Market (ECM)
The equity capital market typically works as a win-win situation for both the organization and the investor. Every organization needs money for its capital and operating expenses, and it raises this money through both debt and equity. In the case of debt, the organization borrows money from financial institutions and repays them a fixed rate of interest. In equity capital markets, the organization sells a part of its ownership to investors and the profits are divided among these investors. Every organization needs to choose the right mix of debt and equity, and the ECM gives them an opportunity to raise this equity.
From the investor's perspective, he/she can invest in a company that is believed to offer the right return for him/her. This choice depends on the financial objectives of the investor, personal preferences and the performance of a company. This is why it is important for investors to thoroughly research a company based on the information provided by its quarterly results. In addition to the returns, investors also have a chance to participate in the decision-making process of the organization as shareholders.
Bulge bracket investment banks will provide ECM services that are comprised of many activities such as marketing, distribution and allocation of new issues, IPOs, private placements, buying and selling of stocks, special warrants and transactions in derivative instruments such as futures and options. Sometimes, businesses may take the help of private financial institutions to raise capital in the equity market as well.