October 11th, 2016

Introduction to capital markets

A very important area of the financial services industry is the capital markets. The capital markets are fundamental to the economy of the country. It promotes economic growth by providing corporations and governments access to capital which enables these organizations to invest in businesses, create jobs, and build infrastructure.

What exactly are capital markets? 

The core responsibility of capital markets is to connect people and organizations that want capital with people and organizations that have capital. Sounds easy, but this is not an easy task. It takes many people working in capital markets to make it happen.

For companies, there are many reasons why they would want to raise capital. It is typically to finance:

  • Startup businesses – investing in new and innovative ideas
  • Ongoing operations – one reason a company may have to do this is because of an unexpected decline in revenue
  • Expansions – at home or abroad, with existing or new products/services, companies often need to borrow in order to grow
  • Strategic acquisitions – sometimes the best strategy is to buy another company such as a competitor

The reason why a person or organization would want to provide capital is more straightforward. As you might have guessed, those who provide capital to borrowers expect to make a profit from their financing efforts. 

The public market

When most people think about the capital markets, they envision a stock exchange. These are considered public markets since anyone can invest. When a company sells securities in the public market for the first time, it is known as an initial public offering (IPO). There are stringent disclosure requirements in the form of a prospectus. In an IPO, the company receives the proceeds from the sale of securities. But the public markets also facilitate the subsequent buying and selling of these securities between investors after the IPO on what is referred to as the secondary market.  

The exempt market

A lesser-known part of the capital markets is the exempt or private market. In the exempt market, securities can be sold without a prospectus, meaning these companies are not required to meet the same strict disclosure requirements as public securities. Raising capital in the exempt market can be attractive to companies since it can provide a cost effective way for them to fund their financing needs.

Historically, these types of investments were the domain of institutional investors, hedge funds, and high net worth individuals since they can only be sold under a prospectus exemption such as an accredited investor or minimum amount exemption. In recent years, the exemptions have expanded and now exempt securities are available to a broader group of investors.

Are you thinking about taking an IFSE course related to exempt markets? Consider these: