In Accounting, there is a basic popular accounting equation – asset equals the sum of capital and liability. To put this in perspective, assets of any company partly consist of capital otherwise called owner’s equity (owner’s money). When entrepreneurs decide to start a business, they need capital or owner’s equity to start. If this is not enough, they can either borrow from friends and family or approach a bank. Most entrepreneurs grow their businesses over the year and majority of them do not survive while the survivors grow to become small and medium scale enterprises. Many large corporations we see around today started as a family business. Large corporation, at some point in the life of the business, needs to borrow or raise money from the capital market – the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. Capital market is broadly divided into two: equity capital and debt capital market; shares or stocks are issued for investors in the equity market while bond is issued for lenders in the debt market. Another categorisation of the capital market is primary and secondary market; companies raise money for the first time in the primary market and investors can subsequently trade the securities or exit their position in the secondary market.
Companies need the service of capital market operators or better put investment bankers, to be able to raise money in the capital market. Some of the capital market participants are listed below:
- Issuing house: This serves as financial adviser to companies or institutions that seek to raise money for the purpose of developing their capital. They also coordinate other parties to the issue.
- Underwriter: This is an insurance company that works closely with the issuing house for the success of the offer; sometimes serves as off takers.
- Solicitor: Solicitor to an issue undertakes due diligence, structuring securities, dealing with multiple intermediaries, massive list of compliances involved, necessary regulatory approvals and most of all managing everything within a limited window of time.
- Stockbrokers: They laisse with the stock exchange and securities and exchange commission for all filings and approval.
- Regulators: Usually, they ensure that all proper filings and documentation have been done before approving the capital raising
Benefits of capital market
- Companies raise capital to finance strategic business objectives,
both at the time of listing as well as through subsequent capital events
- Organisations enjoy a wider range of financing options and have
access to diverse investors, both local and international base and
large pool of public funds to finance growth.
- The status and credibility of companies is enhanced with
business partners, customers and employees owing to the
governance standards required by listed companies
- Quoted price of companies provides an avenue for placing an
objective market value on its business
Furthermore, capital market can be a tool for economic development. Corporations raise additional capital in the capital market to scale their businesses. Expanded businesses provide employment which in turn, dovetail into the economy. Governments, sometimes issue bond to the public (borrow from public) to finance budget deficit. When citizens of a nation invest their savings in the capital market, the resultant effect is capital formation for such country.
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An Entrepreneur