What are Equity Capital Markets?

Equity capital markets are those markets that raise equity capital for companies by issuing stock. The participants in equity capital markets are the financial institutions that underwrite initial public offerings and other equity offerings, and the corporations for whom they raise the equity. Warrants, options, and futures are also managed through equity capital markets.

Investment banks are the financial institutions that underwrite and execute initial public offerings (IPOs) and other offerings on the capital markets. When a company is floating an IPO, the investment bank will assist the company by structuring the offering, advertising it, syndicating it (arranging for a group of investors to take part), and distributing it. If the offering is syndicated, each member of the syndicate will be responsible for selling a portion of the offering.

The investment bank or banks that underwrite a securities issue make their money from the underwriting spread. This fee represents the difference between the price at which the stock is offered to shareholders and the amount of money the issuing company receives for the stock. The spread is agreed upon in advance between the company and the underwriter. If a company is offering shares of stock to the public for $10.50 U.S. dollars (USD) per share, and the company receives $10.00 (USD) per share, the underwriting spread is $0.50 (USD) per share. The underwriters will often guarantee a certain price or number of shares that it will sell.

As a participant in equity capital markets, an investment bank may be best known for underwriting initial public offerings for private companies that wish to go public and raise a significant amount of capital. But there are many other types of offerings that are provided through equity capital markets. For example, an accelerated bookbuild is an equity offering with a very short time horizon that provides equity to a company that is usually trying to purchase another company. Futures contracts, swaps, and other derivative investments are also handled on equity capital markets.

Equity capital markets are one component of the stock market. The stock market is made up of both primary and secondary markets. The primary market is the market in which new issues are offered. The secondary market is the market where stock that has already been issued is traded, or changes hands. By contrast, the bond market is considered a debt capital market, because it raises capital for companies through the use of debt instruments.