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The capital market is the mix of procedures, and tangible and intangible institutions, providing for the transaction of long-term financial products. Products such as stocks, bonds, leases, and term loans may all be sold or traded in the capital market. Investment banks make many of these trades and sales possible, as well as providing other capital market services. Long-term financial products may be traded at physical, organized security exchanges or by using the informal, over-the-counter market.
Investment banking provides vital capital market services in the form of underwriting and distributing new securities. An investment banker may also advise clients about methods of raising long-term capital. When an investment bank underwrites a security, such as a stock offering, it assumes the risk of selling the stock at a price that will generate revenue for the investment-banking firm.
In an underwriting situation, a business doesn’t actually sell common stock directly to public investors. The company sells stock to an underwriting investment banking syndicate that resells the stock to the public. If the stock prices fall, the syndicate suffers losses instead of the stock-issuing company. Businesses with securities that routinely under-perform may have issues securing underwriters for future stock offerings.
Distribution is one of the most essential capital market services. A syndicate must distribute the stocks the firm underwrites. These securities may be traded at security exchanges, through security dealers, or in over-the-counter markets, such as online trading storefronts. In a sense, the stock issuing company is a manufacturer, while syndicates are wholesalers, and security dears are retail stores.
Methods of distribution include negotiated purchase, competitive bid purchase, commission, privileged subscription, and direct sale. When stocks are first issued, dealers sell the securities in the primary market. Any stocks distributed after the first offering are sold using capital market services in secondary markets.
Of the various capital market services, financial advisement has the biggest potential to aid in the creation of a strategic foundation. Since many members of company’s corporate team may not understand the intricacies of the capital market, investment banking advisers offer insight into the current market conditions and relate those conditions to the corporation’s situation. An adviser may also analyze the company’s structure and financial plan, offering strategies for improvement.