Equity Capital Market - ECM

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What is an 'Equity Capital Market - ECM'

An equity capital market (ECM) is a market that exists between companies and financial institutions that is used to raise equity capital for the companies. Some activities that companies operate in the equity capital markets include overall marketing, distribution and allocation of new issues; initial public offerings, special warrants, and private placements.

BREAKING DOWN 'Equity Capital Market - ECM'

Along with stocks, the equity capital markets deal with derivative instruments such as futures, options and swaps.

Equity capital markets are very dependent on the information provided by companies regarding their current financial situations and estimates of future performance. Equity capital market teams from different investments banks are responsible for helping companies execute primary market transactions by managing structure, syndication, marketing and distribution.

The major players within the ECMs are large financial institutions such Goldman Sachs, Citigroup and UBS.

Equity capital markets (ECM) provide a mechanism for businesses to raise additional capital through the issuance of stock. They are financial institutions responsible for underwriting the offerings, including the initial public offering (IPO) when a company completes the process to go public. The underwriting financial institution receives compensation through the underwriting spread.

ECMs are just one component of the stock market, functioning as part of the primary market in regards to IPOs and other new offerings made by companies seeking capital. ECMs do not offer services to individuals as their sole function is the acquisition of new capital by companies requesting services.

Fees Associated With Equity Capital Markets

The underwriting spread is the difference between the amount a particular offering is sold for and what is actually forwarded to the company whose stock is being issued. These fees compensate the institution for the support provided throughout the process, especially during an IPO. This can include assistance in structuring and advertising the offer, as well as syndication and distribution.

Other Service Provided by an Equity Capital Market

Beyond supporting an IPO, an ECM may offer an accelerated book-building option. Futures contracts are often handled through an ECM, as well as swaps. Other derivative offerings may also be included in the services being offered.

Equity and Debt Capital

Equity capital is based on the value of the business and its current assets, essentially selling the right to a particular asset, or portion of an asset, in return for capital. Debt capital is raised through the acquisition of new debt obligations. While the current value of a company and other pertinent financial information may be required as part of the application process, the funding is not provided in exchange for owning a portion of an asset.