Equity Capital Markets

Equity Capital Markets: The Money Party for Companies 🎉

The Big Idea (In One Sentence)

Equity Capital Markets (ECM) is like helping a lemonade stand owner find friends who want to own a tiny piece of their stand and share the profits!

🍋 Our Story: Lily’s Lemonade Empire

Imagine Lily has the best lemonade stand on the street. Everyone loves her lemonade! Now she wants to:

• Open 10 more stands across town
• Buy a big lemonade truck
• Hire helpers

But she needs money. A LOT of money.

She has three choices:

1. Save up slowly (takes forever!)
2. Borrow from the bank (must pay it back with extra - that’s debt)
3. Find partners who give her money in exchange for owning a piece of her business

Option 3 is what Equity Capital Markets is all about!

What is ECM? (Equity Capital Markets Overview)

Think of ECM as a matchmaking service between:

• Companies who need money to grow
• Investors who want to own part of successful businesses

How It Works

graph TD
    A["Company Needs Money"] --> B["Investment Bank Helps"]
    B --> C["Find Investors"]
    C --> D["Investors Buy Shares"]
    D --> E["Company Gets Money to Grow"]
    E --> F["Investors Own Part of Company"]

Real-Life Example

When Facebook needed money to grow bigger, investment banks helped them find millions of people who wanted to buy tiny pieces of Facebook. Each piece is called a share or stock.

Key Players in ECM

🎈 The IPO Process: The Big Birthday Party!

IPO stands for Initial Public Offering.

Think of it like Lily’s lemonade stand having its first big birthday party where she invites EVERYONE in town to become part-owners!

Before IPO vs After IPO

The IPO Journey (Step by Step)

graph TD
    A["1. Company Decides to Go Public"] --> B["2. Hire Investment Banks"]
    B --> C["3. Prepare Documents"]
    C --> D["4. Roadshow - Tell the Story"]
    D --> E["5. Set the Price"]
    E --> F["6. Launch Day - Ring the Bell!"]
    F --> G["7. Trading Begins"]

Let’s Break Each Step Down:

Step 1: The Decision Lily decides: “I want to share my lemonade empire with everyone!”

Step 2: Hire Helpers (Investment Banks)

• Banks like Goldman Sachs or Morgan Stanley help
• They’re like party planners for this big event
• They help figure out how much the company is worth

Step 3: Prepare Documents (The Prospectus)

• Like writing an invitation that explains EVERYTHING
• How much money the company makes
• What risks exist (maybe it could rain and nobody buys lemonade!)
• What they’ll do with the money

Step 4: The Roadshow

• Lily travels around telling big investors her story
• “Here’s why my lemonade stand is amazing!”
• “Here’s how I’ll use your money to grow!”

Step 5: Set the Price

• How much should one piece cost?
• If Lily’s whole business is worth $100:
  • She could sell 100 pieces at $1 each
  • Or 10 pieces at $10 each

Step 6: Launch Day!

• The big day arrives
• At stock exchanges, they ring a bell to celebrate
• Shares start trading publicly

Step 7: Trading Begins

• Now anyone can buy or sell Lily’s shares
• Prices go up and down based on how well the business does

Famous IPO Example

Airbnb IPO (2020):

• Started at $68 per share
• First day it jumped to $144!
• Raised $3.5 billion

🔄 Follow-On Offerings: Coming Back for More!

Imagine Lily’s IPO was a huge success. Now, two years later, she wants to build lemonade factories worldwide. She needs MORE money!

A Follow-On Offering is when a company that’s ALREADY public sells MORE shares.

Two Types of Follow-Ons

graph TD
    A["Follow-On Offering"] --> B["Primary Offering"]
    A --> C["Secondary Offering"]
    B --> D["Company Sells New Shares"]
    B --> E["Company Gets the Money"]
    C --> F["Existing Owners Sell Their Shares"]
    C --> G["Sellers Get the Money"]

Primary Offering:

• Company creates NEW shares and sells them
• Company gets the money
• Example: Lily prints 10 more ownership certificates and sells them

Secondary Offering:

• Existing owners sell THEIR shares
• Those owners get the money, not the company
• Example: Lily’s original investors sell some of their pieces

Why Do Follow-Ons?

Real Example

Tesla (2020): Already public, raised $5 billion more through a follow-on to build more factories!

✋ Rights Issues: The Family Discount

Imagine Lily needs more money, but she wants to be fair to her current part-owners first.

A Rights Issue gives EXISTING shareholders the RIGHT to buy more shares BEFORE anyone else - usually at a DISCOUNT!

How Rights Issues Work

graph TD
    A["Company Needs Money"] --> B["Offers Rights to Current Shareholders"]
    B --> C{Shareholder Decision}
    C --> D["Use Rights: Buy Discounted Shares"]
    C --> E["Sell Rights: Get Cash"]
    C --> F["Ignore: Rights Expire Worthless"]

Simple Example

You own 100 shares of Lily’s Lemonade at $10 each.

Lily announces a 1-for-4 rights issue at $7:

• For every 4 shares you own, you can buy 1 more
• You own 100, so you can buy 25 new shares
• Normal price: $10, Your special price: $7
• You save $3 per share = $75 total savings!

Why Companies Do Rights Issues

Real Example

HSBC Bank (2009): During the financial crisis, raised $17.7 billion through a rights issue to strengthen their finances.

🤫 Private Placements: The VIP Room

What if Lily doesn’t want a big public party? What if she just wants to invite a few wealthy friends to invest quietly?

A Private Placement is selling shares to a small group of big investors (not the general public).

Public vs Private Placement

Who Buys in Private Placements?

graph TD
    A["Private Placement Buyers"] --> B["Hedge Funds"]
    A --> C["Private Equity Firms"]
    A --> D["Wealthy Individuals"]
    A --> E["Pension Funds"]
    A --> F["Insurance Companies"]

Why Choose Private Placement?

Faster: No need to prepare big public documents Quieter: No press or public attention Simpler: Fewer rules to follow Flexible: Can negotiate special terms

Real Example

SpaceX: Instead of going public, Elon Musk regularly raises money through private placements from big investors who believe in space travel!

🎯 Quick Comparison: All Four Methods

💡 Why This Matters to You

Understanding ECM helps you:

1. As an investor: Know what it means when a company “goes public” or does a “follow-on”

2. As a future business owner: Understand how to raise money for your dreams

3. Reading the news: When you hear “Tesla raised $5 billion” - now you know how!

🎉 You Made It!

You now understand how companies raise money by selling ownership pieces. Whether it’s a big public party (IPO), coming back for more (Follow-On), giving loyal fans first dibs (Rights Issue), or having a private VIP event (Private Placement) - it’s all about connecting companies who need money with people who want to invest!

Remember Lily’s Lemonade Stand:

• ECM = Finding investors to own pieces of your business
• IPO = First time selling to the public
• Follow-On = Selling more shares later
• Rights Issue = Current owners get first chance at discount
• Private Placement = Selling quietly to select big investors

The world of finance just became a little less scary. You’ve got this! 🌟