BUS 353 Part I: Understanding Capital Markets

A. Capital 1.Capital is defined as wealth, generally money or property 2.Capital Providers – people and institutions willing to lend money or to buy a stake in an organization, expecting to realize a profit (positive rate of return on invested capital)

A. Capital 3.Capital Seekers – businesses and governments searching for funding to finance their projects through borrowing or through selling partial ownership in their businesses 4.Capital Markets – the setting where capital providers and seekers meet

A. Capital 5.Investment Capital – wealth put to work, seeking a profit 6.Profit – a positive return on invested capital, can be either interest or an increase in invested capital’s value (capital appreciation)

B. Types of Markets 1.Primary Market – direct sales of debt or equity to investors in return for capital a.Debt – a loan from investors to businesses or government, provides interest to the investor b.Equity – an ownership interest in the business 2.Secondary Market – the purchase or sale of debt or equity between investors, generally through intermediaries

C. Market Pricing 1.When buyers exceed sellers (demand exceeds supply), prices rise 2.When sellers exceed buyers (supply exceeds demand), prices fall 3.Command Economies – where prices are set by a central authority rather than the market

D. Raising Capital 1.Start Up Capital – seed capital – debt or equity used to organize a business – can be obtained from angel investors or from the founders’ savings, and/or from debt incurred by the founders

D. Raising Capital 2.Venture Capital – provided by firms that specialize in providing funding for business ventures, venture capital firms generally invest in small firms with the potential for increasing revenues (growth), in return for an ownership share of the business

D. Raising Capital 3.Private Placement – a sale of debt or equity to qualified (wealthy) individuals – avoids registration and reporting requirements 4.Capital Markets a.Initial Public Offering (IPO) – the sale of stock by a corporation to the general public, subject to registration and reporting requirements

D. Raising Capital 4.Capital Markets (Continued) b.Publically Traded Debt Securities – where a firm borrows money from the general public subject to a contract (i.e. – bonds)

D. Raising Capital 5.Investment Banks a.Provide services and advice to companies regarding the best method of raising capital b.Serve as underwriters – purchase securities in an Initial Public Offering to hold or for resale to the public