The financial universe is so vast that now and then you may hear about a new terminology, which offers something different from the usual. One such segment of the financial ecosystem the Equity Capital Market (ECM) plays a significant role in helping companies raise funds and letting investors own a piece of a business and participate in its potential growth.
In this article, we will help you understand what the Equity Capital Market is, how it works, the different types of ECMs and who participates in them.
Table of contents
Understanding equity capital market (ECM)
The Equity Capital Market, or as it is called, ECM, is an integral part of the financial ecosystem, allowing companies to raise funds by selling shares to financial institutions and investors. ECM comprises two main categories. A primary marketfor private placements and initial public offerings (IPOs). Plus, a secondary market for trading existing shares, futures, options, and other securities.
The ECM makes it possible for both investors and companies to meet their needs. While businesses get the capital they need, investors get a chance to earn returns through dividends or by selling shares at a high price later.
Another term, Capital Market, is an even broader umbrella that includes the ECM plus the Bond Market.
Functions of an equity capital market
- Raising capital for companies: ECM’s main role is to help companies raise long-term capital.
- Providing investment opportunities: ECM allows investors to buy shares and earn potential profits.
- Price discovery: Through regular buying and selling, the ECM helps find the fair market value of a company's shares.
- Liquidity: The ECM offers liquidity by allowing shareholders to sell their shares easily in the secondary market.
Participants in the equity capital market
- Companies (Issuers): These are businesses that need funds.
- Investors: They buy shares hoping to earn returns. Investors can be individuals, mutual funds, insurance companies, pension funds or foreign institutions.
- Investment banks: They help companies with IPOs and other share offerings.
- Regulators: In India, SEBI (Securities and Exchange Board of India) is the main regulator.
Structure of equity capital markets
There are two main ways companies raise money through the ECM:
Primary equity market
The primary equity market is where companies sell new shares to raise money. It is further divided into two main parts. One is the private placement market, and the other is the public market. In the private placement market, companies sell shares directly to selected investors and not to the general public. These shares are not traded on the stock exchange. In the public market, companies can raise money by offering shares to the public. Private companies do this through an Initial Public Offering (IPO), while already-listed companies can issue more shares through follow-up offerings.
Secondary market
This is the market which most people call the “stock market”, where investors buy and sell shares that are already listed. This market includes stock exchanges like the NSE or BSE and over-the-counter (OTC) markets, where dealers trade shares directly with each other without using a stock exchange.
Read Also: Key Difference Between Equity and Commodity Market Explained
Equity capital markets in India
In the last few years, the Indian ECM has seen robust growth. Many companies across sectors like technology, finance and healthcare have raised funds through IPOs and public offerings.
Recent data indicates strong investor confidence, with domestic institutional investors surpassing foreign portfolio investors in ownership of listed companies on the National Stock Exchange (NSE). The IPO market has been rebuilding momentum into 2025.
Small and medium enterprises (MSMEs) have also tapped the ECM through dedicated platforms. Simultaneously, the growing market capitalisation of listed companies on the NSE is also indicative of scale of the Indian ECM.
Perhaps the most heartening aspect of India’s rapidly evolving investment landscape is booming retail participation––thanks to ever-expanding digital infrastructure and a rising middle class focused on growth investing.
Read Also: Private Vs Public Equity: Key Differences and Suitability
Advantages and disadvantages of raising capital in equity markets
Advantages
- Raise funds: Companies don’t need to take on any loans as the capital is raised through equity. They can start new projects or upgrade their operations.
- Boost reputation: Going public can increase a company's trust and visibility in the market.
- More investment options: Investors get access to a variety of shares to build a diverse portfolio.
- High return potential: Equity investments can offer high returns, especially in fast-growing companies.
Disadvantages
- Price fluctuations: Since stock markets can be unpredictable, they can affect both companies and investors.
- Heavy regulations: Going public means following strict rules and sharing detailed company information.
- Ownership dilution: Issuing new shares can reduce existing shareholders' ownership.
- Pressure to perform: Public companies face constant pressure to meet investor expectations.
Conclusion
The Equity Capital Market plays a key role in shaping the financial and economic future of a country. It helps businesses raise funds, creates opportunities for investors and contributes to overall economic development.
FAQs:
What Is Equity Capital and Debt Capital?
Equity Capital is the money raised by a company through the sale of shares. Investors become part-owners and share in the company’s profits or losses.
Debt Capital is the money borrowed by the company, usually through loans or bonds. It must be repaid with interest.
How Is Equity Capital Calculated?
Equity capital is generally calculated as:
Shareholders’ Equity = Total Assets − Total Liabilities
What Are the Types of Equity Capital?
Authorised Capital: The maximum amount of capital a company is allowed to issue legally.
Issued Capital: The part of authorised capital that is sold to shareholders.
Subscribed Capital: The portion of issued capital that investors agree to buy.
Paid-in Capital: The amount that shareholders have paid for the shares.
Equity Shares (Common Shares): These come with voting rights and profit sharing but carry more risk.
What Is the Difference Between Capital and Equity?
Capital is a broader term that refers to any financial resource used to fund a business. This includes both equity and debt. Equity, on the other hand, refers specifically to ownership value of a business. It is one form of capital.
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