Companies receive capital in exchange for equity in the capital markets.
Capital markets provide new and existing companies with access to cash or capital. Companies use this capital to cover day-to-day operating costs and to finance expansion. The advantages of capital markets include job creation, economic growth and technological innovation.
In many cases, capital markets take the form of stock exchanges where companies trade debt securities, such as bonds, and equity securities, such as stocks. Bondholders are creditors who lend money to institutions for a set period of time in exchange for interest payments. Shareholders are the owners of publicly traded companies and funds from stock purchases are reinvested in the company. Most companies issue stocks and bonds; these bonds are normally tradable, which means that the original purchaser of the bond can sell it to another investor at a later date. The advantages of capital markets such as stock exchanges include the fact that these venues provide a place where those seeking funding can connect with potential lenders and investors.
Companies use capital to cover day-to-day operating costs and to finance expansion.
In addition to physical locations such as stock exchanges, capital market transactions also include private investment agreements between individuals and companies. Some of these deals are brokered by private equity firms that introduce investors to the firm’s quest for capital. In other cases, a business owner may directly approach an individual and ask for a loan or a capital injection. Many conventional lenders are unwilling to finance start-ups or businesses involved in speculative ventures. The advantages of capital markets also include the fact that high-risk borrowers can gain access to much-needed funds.
Firms directly benefit from capital markets because many firms would become insolvent in the absence of formal or informal investment markets. The advantages of capital markets are also realized by employees of companies that grow and expand as a result of capital infusions. These individuals have more opportunities for career advancement and job promotion. In addition, expanding companies open new factories and offices, and along with new workplaces, these companies also create new jobs. As companies grow, new technologies are developed and researchers and marketing agents are employed to create and develop these products.
When a large number of companies start to hire additional workers, the economy of a particular country or region starts to expand because those workers reinvest their money in the economy when they buy goods. This means that profit levels start to increase in retail and manufacturing companies and these companies often use these funds to expand operations and create more jobs. In addition, some publicly traded companies pass profits on to shareholders in the form of dividend payments. Consequently, investors indirectly benefit from their equity investments when they receive dividend payments.