The Role of Equity Markets

The Role of Equity Markets

Lindsey Matthews

30 years: Risk management & derivatives trading

In the previous video, Lindsey Matthews explained the working of debt markets. In this video, he will cover equity capital markets. Lindsey first explains who uses these markets before explaining how they work.

In the previous video, Lindsey Matthews explained the working of debt markets. In this video, he will cover equity capital markets. Lindsey first explains who uses these markets before explaining how they work.

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The Role of Equity Markets

5 mins 7 secs

Key learning objectives:

  • Outline who can use the equity capital markets

  • Understand how the equity capital markets work

Overview:

Another side of the capital markets through which companies and individuals can lend and borrow is through the equity capital markets. The investors in the equity – or shareholders – get a share of the profits and experience any increase or decrease in the value of the company’s shares. They receive any dividends that are paid on their shares, and get to vote on key aspects of the running of the company.

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Summary

Who uses the equity capital markets? 

Any company can theoretically sell equity (shares), as long as they can find the investors. 

Equity can be sold privately by very small, new companies, to friends, family or other contacts, or if the company is on a strong enough growth trajectory, even private equity funds. 

Equity is also issued by larger companies with longer track records – often as public securities, listed and traded on regulated securities markets. 

Investors can be individuals or companies and they will want to ensure they understand the nature of the companies they are investing in. They will seek to understand the nature of this business, its competitive and regulatory landscape, the market in which it operates, the quality of the management, its products and the prospects for them, as well as many financial measures of performance and current position that will be important in assessing the value of a company.

How do the equity capital markets work?

The equity capital markets are divided into the primary market and secondary markets, similar to the debt capital markets. 

The primary markets are for newly issued shares, when shares have been issued through an initial public offering. Larger companies issuing shares will generally work with an investment bank’s ‘equity capital markets’ team on the pricing and syndication or selling of the shares. For very large public offerings of shares, multiple investment banks and lawyers will likely be involved.

Once shares are issued, they are traded in the secondary marketUnlike most bonds, equities are listed and traded on formal regulated exchanges with transaction information being more generally available, along with the price. 

Within the equity markets there are participants who will act on behalf of clients to buy and sell shares on their behalf  - they are known as brokers or stockbrokers, as they broker the investment transaction on behalf of their clients.

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Lindsey Matthews

Lindsey Matthews

Lindsey runs Perfordiant, an investment risk and performance consulting firm. He has worked in financial markets since 1992. Lindsey became an MD in fixed income and equities, ran a Risk function, and was on the management team of an Asset Management fintech business. Lindsey is now a Visiting Fellow at the Henley Business School, and resides on the board of CFA UK.

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