Markets have been a cornerstone of society throughout much of history. Traditionally, marketplaces are for transacting, buying essentials and obtaining the best price. Capital markets share many of these attributes but instead of trading in goods, participants use them to buy and sell financial instruments. So how do capital markets function and why are they an intrinsic part of the financial system?

This is capital markets: Unpacked.

In a nutshell, many companies raise funds in capital markets. This is also where lenders can buymake loans, and investors can buy debt securities or equity. In this broad marketplace, institutions of all shapes and sizes come together to transact or exchange.

And what makes up capital? Essentially, capital is money, but the term can also refer to a company’s assets that have monetary value. When a company wants to raise capital, this generally means raising funds to invest in its future.

We can divide public capital markets into two categories: equity capital markets and debt capital markets.

Equity securities, such as shares of ownership in a company, are traded in equity capital markets. Issuers — the corporations or organizations aiming to raise money — use equity capital markets to sell shares. An IPO is often the first step, making the company public so its shares can be sold on an exchange. From there, companies can pursue additional transactions if they want to raise more capital.

Debt securities, likesuch as corporate bonds, are raised and traded in debt capital markets. For example, say company A, a high-street retailer, wants to expand its footprint. It may issue debt securities to raise capital, and must pay interest to the investors who buy them. Itit.  The company must also pay back the principal atby the end of the term.

Companies may also consider raising debt by borrowing loans, which must be repaid. Think of a loan like this: when you buy a property and take out a mortgage, you borrow money from a bank. You then pay this back with interest. In the case of our high-street retailer example, Company A may also decide to borrow a loan instead of issuing debt, which is provided by a lender or group of lenders.  Over time, the company must repay the loan with interest.  [WL(G1]

Typically, debt raised by companies is broadly distributed to a variety of lenders and investors.  However, there are also direct lender, or private capital markets – historically. Historically, only a select number of specialist firms madeprovided most large “private investments.loans”. Now, many other institutional investorslenders exist including family offices, private equity firms, mutualcredit funds, hedge funds, sovereign wealth funds and, pension funds and even banks. For most companies, though, public capital markets may hold the key to lower pricing, more attractive terms. and greater liquidity.

The big question is, which approach is best? The answer depends entirely on the individual aims and current financial situation of the company. After company A funds its expanded retail footprint, it may want to pursue growth over the next five years. This differs from Company B, a health care organization with ageingaging infrastructure — it may need new facilities, and fast. Both companies consult with an investment bank, and bankers working in the capital markets division provide strategic views on the potential paths forward. They will consider a broad array of factors: can the company afford to repaypay interest? Is it a public alreadycompany? Does it need to minimize the cost of capital? These factors and many more will be taken into account, so bankers can make tailored recommendations to help company A and company B achieve their goals.

Banks are in the unique position to understand the inner workings of capital markets and have ongoing relationships with investors and issuers of securities, and lenders and borrowers of loans. By leaning on the recommendations and execution capabilities of their banking partners, clients can raise capital in the best ways for them. And when they want to take the next step on their journey, many more opportunities will be waiting for them. It all starts, and ends, with capital markets.