Equity Capital Markets, Definition, Types, How It Works?
Equity Capital Markets are platforms where companies raise funds by issuing shares and trading stocks. Explore how ECM works, its types, and insights into India’s growing equity market.
Mridula Sharma21 Jun, 2025
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Equity Capital Markets: Equity Capital Markets (ECM) represent a vast network of financial institutions and platforms that facilitate businesses to raise funds through trading. This includes the primary market, where companies issue new shares through mechanisms like IPOs and private placements, and the secondary market, where existing securities are bought and sold on stock exchanges.
An IPO, or Initial Public Offering, is when a privately owned company sells its shares to the public for the first time. This turns the company into a publicly owned one and provides money that can be used for paying debts, buying other companies, or solving cash flow problems. For a private company, going public through an IPO is a crucial moment. How well the IPO goes can greatly affect the company's future.
For CA aspirants, mastering ECM isn’t just exam prep, rather, it’s a stepping stone to understanding how real-world finance works. Therefore, candidates aiming to clear CA exams must understand what equity capital markets are, their types, and how they function.What Are Equity Capital Markets?
The equity capital market (ECM) is where companies get funding by selling shares, and where stocks are bought and sold. It's made up of two parts: the primary market, where new shares are first sold, and the secondary market, where existing shares are traded along with other financial products like futures and options. Think of the ECM as a big financial hub, not just limited to stocks. It deals with various activities like selling new shares (IPOs), private funding, and trading different financial products. The key players here are investment banks, brokers, investors, and firms looking to invest in companies. Working alongside the bond market, the ECM helps move money from savers and banks to investors. This system, in theory, helps make sure money is used efficiently in the economy.Types of Equity Capital Markets
The following are two main types of equity capital markets: Primary Equity Market The primary equity market involves companies issuing new securities. It has two main parts: the private placement market and the primary public market. In the private placement market, companies sell unquoted shares directly to investors to raise private equity. In the primary public market, private companies can become public through IPOs, and listed companies can offer new equity through seasoned issues. Secondary Equity Market The secondary market, often referred to as the "stock market," doesn't create new capital. Instead, it's where existing shares are bought and sold. This market includes stock exchanges and over-the-counter (OTC) markets. In OTC markets, dealers trade stocks without an intermediary exchange.| Also Check: | |
| Management Accounting | Financial Accounting |
| Auditing and Assurance | Taxation |
| Financial Management | Business Laws and Ethics |
Raising Capital in Equity Markets
Raising funds through the stock market has its perks for companies. Firstly, it means they don’t have to rely heavily on borrowing money, which can be costly due to high interest rates. Instead, they sell shares, which helps keep their debt levels lower. Plus, the stock market offers more flexibility and diverse options for funding growth compared to borrowing. Sometimes, going public also allows company founders to bring in experienced advisors, which can be a big help in expanding into new markets or products. However, there are downsides to this approach too. Going public can be a lengthy and pricey process involving many parties, which adds to the overall cost and time. Also, once a company is public, it's under constant scrutiny. While stock investors may be more willing to take risks than lenders, they still expect good returns. If a company consistently fails to deliver profits, investors might lose interest, causing its stock value to plummet. Also Check: Stock Market Classes for BeginnersEquity Capital Markets in India
Despite the global economic downturn caused by the pandemic, India's economy has shown resilience. Even during the turmoil in May and June 2020, when stock markets were volatile and trading was disrupted, India managed to bounce back. In October 2020, India's equity capital market reached an all-time high, raising over $32.7 billion, surpassing the 2017 record. This marked an impressive 85% increase compared to October 2019. This surge can be attributed to two main factors: government intervention at both central and state levels, and companies holding onto cash due to uncertainty, leading to increased liquidity in their balance sheets. Analysts predict that more major corporations will follow the lead of companies like Reliance Industries, which raised a record-breaking $7 billion through rights offerings in June 2020. However, global equity markets are still under pressure. Without significant intervention from international organizations like the World Bank, IMF, and others, the global economy is likely to remain stagnant until an effective vaccine is widely available. This uncertainty affects both emerging and developed markets. Get ahead in your CA exams with our PW CA Courses! Master Equity Capital Markets and more to excel in your career. Enroll now for expert guidance and comprehensive study materials.| Also Check | |
| Activity-Based Costing (ABC) | International Standards on Auditing (ISA) |
| Continuing Professional Development for Chartered Accountants | Direct Tax |
| Due Diligence | Tax Audit |
Equity Capital Markets FAQs
What are Equity Capital Markets (ECM)?
Equity Capital Markets (ECM) are where companies raise funds by selling shares and where stocks are traded. It consists of the primary market for new share issuance and the secondary market for existing share trading.
How do IPOs help companies raise funds?
IPOs (Initial Public Offerings) enable privately-owned companies to sell shares to the public for the first time, providing them with capital for various purposes like debt repayment, acquisitions, or addressing cash flow issues.
What are the primary and secondary equity markets?
The primary equity market involves the issuance of new securities through methods like IPOs and private placements. In contrast, the secondary equity market facilitates the trading of existing shares among investors, including exchanges and over-the-counter markets.
How does raising capital through the stock market benefit companies?
Raising capital through the stock market reduces reliance on debt, offers flexibility in financing options, and allows for bringing in experienced advisors. However, it also entails costs, time, and ongoing scrutiny from investors.
What factors contribute to India's resilient equity market despite global economic challenges?
India's equity market resilience amidst global uncertainties is attributed to government interventions, increased liquidity in company balance sheets, and major corporations' successful fundraising initiatives, like Reliance Industries' record-breaking rights offering.
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