What are Equity Capital Markets (ECM)?

//What are Equity Capital Markets (ECM)?
What are Equity Capital Markets (ECM)? 2017-10-27T02:14:58+00:00

Definition: Equity capital markets (ECM) are marketplaces where companies can raise long-term equity through the trade of common stocks and preferred stocks.

What Does Equity Capital Market Mean?

What is the definition of equity capital markets? Equity capital markets are the stock markets where the shares of the companies are traded either on the NYSE or the NASDAQ or on the OTC markets. In fact, equity capital markets serve as a protective mechanism for companies seeking to raise capital through initial public offerings (IPOs), private placements or the issuance of new stocks. Listed companies can be small caps, mid caps or large caps whereas traders can be securities firms, investment banks or retail investors.

Let’s look at an example.

Example

Company X seeks to raise equity capital through the issuance of $10,000 new shares at the price of $23.12 per share. The company offers the new shares in the equity market, and investors are purchasing the stocks for a total of 10,000 x $23.12 = $231,200. By purchasing the stocks, investors acquire ownership in the company, i.e. they gain voting rights in the firm’s decision-making as well as a claim right on the firm’s future earnings.

Through the stock market, company X raises the capital to fund its operations. Investors can hold the shares or sell them on the stock exchange if the price rises higher than $23.12, therefore realizing a profit.

Equity capital markets are important for the economic activity because they bring together companies that seek to raise capital with investors who seek for investment opportunities. Also, they offer a protective mechanism through the secondary market, where investors can exchange their shares based on the law of demand and supply, thereby creating liquid markets. Finally, the stock prices determine the level of consumer spending (for retail investors) and of investment spending (for the firms) as based on the liquidity of the markets, the firm will know the funds that it can raise by issuing new stocks.

Summary Definition

Define Equity Capital Markets: ECM means an exchange where companies can raise funding by issuing ownership shares to new investors.