How Are Equity Capital Markets Different From Debt Capital Markets?

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All of us see the Investment Banking industry as a golden opportunity of having a stellar career in finance, but how many of us know why? While you do need to put in exceptionally long hours at work, the pros will outnumber the cons.

The work of Investment Bankers revolves around building complex financial models and valuation research, which makes them decent investors.

They also face a steeper learning curve as they're exposed to high-profile transactions. If you've worked in the industry for even the briefest time, you'd have a lot to show for it.

But exactly what kind of work takes place in Investment Banking? The following are the four key activity areas of it:


Trading and Brokerage

Asset Management

Capital Markets

In this article, we'll explore the Equity and Debt Capital Markets in detail to learn about the factors that set them apart. Later, we'll also discuss how Equity Market Capitalisation is linked with the ECMs.

Equity Capital Markets Vs. Debt Capital Markets: The Major Differences

Before we begin with the differences, let's quickly talk about what these markets are.

Both equity and debt capital markets are financial markets that provide companies with a platform to raise capital for their operations and funding. So, in what aspects do they differ from each other? Let's find out below!

1. Differences of ownership

The first and most important difference between the two capital markets is ownership.

In ECM, companies sell their ownership to interested investors, while in DCM, they sell debt instruments like bonds, notes, and loans.

It's important to remember that in the latter market, they don't raise capital immediately but will be repaid over a fixed period with interest.

Furthermore, there is an obvious difference in the nature of investment that takes place in both markets. In ECM, companies invest in the market itself, whereas in DCM, loans are the major instrument of their investment.

2. Differences in cost and returns

It is worth noting that the cost of debt is cheaper than that of equity, which makes investing in DCMs a cheaper option for the companies than in ECMs.

But there are two sides to this coin. As opposed to the DCMs, where your potential returns are fixed, investing in the ECMs promises potentially greater returns.

3. Differences in risk

Do you think it's necessary for ECMs to surpass the DCMs in terms of returns? Because there are cases where no such thing happens.

The truth is, because the investment in ECMs is subject to the fluctuation of the stock market, they come with a higher risk attached to the promise of higher returns.

On the other hand, just like the nature of return in DCMs, the scope of risk in these investments is fairly low as well.

4. Differences in the term period

The last significant difference between these two capital markets is the term period for which they fetch returns. The investments made in DCMs fetch returns in the form of interest on the borrowed capital, which is paid over a fixed time period.

On the other hand, the returns of investments made in ECMs have a long-term nature. This is also why companies invest in this market to facilitate their growth, expansion, or operations.

The importance of ECMs in Equity Market Capitalisation

Now that we have a good idea of how investing in ECMs work, let's proceed to see how it's linked with Equity Market Capitalisation.

But what is equity market capitalisation? It is the overall value of all the stocks of a company traded in the public markets. And where do ECMs come into the picture?

Well, the Equity Capital Markets provide companies with a platform to issue and trade their shares of stock. This is why they play a central role in any change taking place in companies' Equity Market Capitalisation.

Sharpen your knowledge of Investment Banking at Imarticus Learning

With that, you've learned the fundamental differences between capital markets, which are important pillars of Investment Banking.

However, we've barely scratched the surface here; there's so much more to learn in this industry to build or accelerate your banking career.

Are you looking for a comprehensive certification course that can teach you all that, alongside adding significant value to your resume? If so, Imarticus Learning is just the right platform for you.

It has launched an Executive Programme in Investment Banking and Capital Markets in collaboration with IIT Calcutta. The 1-year-long course is open to all working professionals with two years of relevant work experience.

This online training programme will not just help you enhance your knowledge in Investment Banking but will also provide you with the Alumni status of the esteemed IIM.

Curious to know more about this programme? Check more details here!

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