1.1. Role and functions of capital markets - Issuer's Guide (2024)

1. Why Capital Markets?

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What is the added value from market-based financing, and why should you consider it as an alternative or complement to bank-based financing?

Capital markets (including private equity, loan funds, trading platforms) play an important role in supporting economic growth as market-based finance enhances the efficiency of the Company financing mix.

With funding sourced from capital markets, either exclusively or as a complement to bank-based financing, your Company can grow quickly and take on new projects and/or expand geographically with more flexible and efficient funding models. These advantages come along with a potential huge appreciation of your brand by clients, suppliers, and other stakeholders. This credibility is usually perceived as a Company´s commitment to more consistency, accuracy and safety. In the case of Equity, your Company may be funded while decreasing leverage, thus mitigating the negative impact on financial ratios and the long-term maturity risk of holding a portfolio entirely composed of loans. Additionally, market-based financing enables risk rebalancing, which will improve the risk profile of the business and better manage the economic cycles.

Market-based finance is also a good option from an environment, social and governance (“ESG”) perspective, as it encourages the alignment of your Company´s policies with best market practices in this fields. Capital markets can also be very adaptable to the specific characteristics of each Company and offer great flexibility in terms of pricing and maturity, as well as access to a wider investor base. They can also offer funding for innovation projects with a risk profile that may not fit into the typical models for granting bank loans. Furthermore, with a wide range of funding instruments offered, companies benefit from more financing alternatives, entrepreneurs are able to increase the liquidity of their personal assets, reducing risk and investors in capital markets diversify their portfolios and financial risk. Market-based finance also triggers a virtuous cycle between entrepreneurs, companies and investors.

For companies looking for market-based finance, the process of planning and preparing for market access has many benefits as this process will provide the Company’s management with the opportunity to deeper analyze the Company’s strategy, as well as, to receive valuable feedback from market players with new perspectives, which ultimately lays the ground for better decision making. This feedback will be received not only during the process, but after it, opening a communication channel with stakeholders, including investors, analysts, and the media. Additionally, the reporting and corporate governance protocols arising from entering the market will encourage greater professionalization, efficiency and transparency, attracting the attention from existing and potential new investors. As consequence of increased transparency, the Company’s image and prestige, nationally and abroad, will be boosted, as well as its credibility with clients, suppliers, business partners, and financial institutions.

You may currently be thinking on how you can successfully execute this process to capture the opportunities referred above. This guide was prepared to help you confidently face this process by managing its impacts and choosing the right partners to go along you in this challenging but fruitful path. CMVM will be available for any clarification you may need regarding the matters contained in the guide, as well as aclose participant during the process of accessing to the market.

Capital markets bring buyers and sellers together to invest and divest in shares, bonds and other financial assets. Market-based finance promotes the transformation of ideas into entrepreneurial initiatives and small businesses into big companies.

Capital markets have evolved and now offer a wide range of products to fill the different needs of companies, while providing information transparency and legal certainty for all market participants and enhancing liquidity of all products traded.

Their main functions are to:

Finance the economy

Capital markets offer continuous availability of funds to finance companies, by linking companies, savers, and investors, facilitating transaction settlement, promoting saving habits, and channelling part of the savings into new and attractive investment opportunities. Such process contributes to the financing of the economy while improving the effectiveness of capital allocation, supporting innovation, and facilitating entrepreneurship.

Promote liquidity in the markets

Capital markets provide the possibility to invest in securities with different risk profiles, appealing to different investors’ preferences. Accordingly, the capital markets facilitate the movement of capital and liquidity, given the possibility to invest and divest through the purchase and/or sale of the securities in the market. Entrepreneurs may find in capital markets an alternative to reduce their risk, as they can transform parts of their business assets into liquidity.

Provide funding alternative

Capital markets minimize transaction and information costs for Issuers and Investors, and provide an alternative source of funding that may be used in addition to bank finance.

Efficient price discovery

Capital markets enable assets’ pricing, by having prices determined by matching supply and demand, which is (almost) immediately present, based on the information available on the companies. On some trading platforms, price formation takes place in real time.

1.1. Role and functions of capital markets - Issuer's Guide (2024)

FAQs

1.1. Role and functions of capital markets - Issuer's Guide? ›

Capital markets bring buyers and sellers together to invest and divest in shares, bonds and other financial assets. Market-based finance promotes the transformation of ideas into entrepreneurial initiatives and small businesses into big companies.

What are the role and functions of the capital market? ›

Capital markets play a pivotal role in the formation of capital by enabling companies and other entities to raise funds for various purposes. Through mechanisms like IPOs and bond issuances, businesses can access the necessary capital to fuel expansion, research and development, and other strategic initiatives.

What are the functions of capital market authority? ›

Ensuring proper conduct of all licensed persons and market institutions. Regulating the issuance of the capital market products. Promoting market development through research on new products and institutions. Promoting investor education and public awareness.

Who are the issuers in the capital market? ›

An issuer is a legal entity that develops, registers and sells securities to finance its operations. Issuers may be corporations, investment trusts, or domestic or foreign governments. Issuers make available securities such as equity shares, bonds, and warrants.

What are the key role and functions of the capital markets with those of the money markets? ›

“They serve different purposes and carry different risk levels. Money markets are typically shorter-term and carry less risk but offer less potential reward. Capital markets are typically longer-term and offer greater risk but potential for greater rewards,” Milan explains.

What are the five roles of financial markets? ›

The 5 roles of financial markets are ensuring a low cost of transactions and information, ensuring liquidity by providing a mechanism for an investor to sell the financial assets, providing security to dealings in financial assets, and providing facilities for interaction between the investors and the borrowers.

What is the role of capital market intermediaries? ›

Capital markets often witness a gap in information between the investor and the companies. Financial intermediaries play a crucial role in assessing the risk, and credibility of the borrower, and ensuring the funds are allocated to the right financial instruments.

Why are issuers important in the financial markets? ›

The Issuer creates these securities to raise capital and fund their operations. Understanding the nature of Issuers is crucial as they play a significant role in determining the structure and functioning of financial markets.

What are the issuer obligations? ›

Issuer Obligations means all principal and interest, at any time and from time to time, owing by the Issuer on the Investor Notes and all costs, fees and expenses payable by, or obligations of, the Issuer under the Indenture.

What is the role of capital markets in economic development? ›

Capital markets provide a platform for raising funds from investors who have surplus capital to invest and channeling them to borrowers who need capital for various purposes, such as business expansion, infrastructure development, innovation, etc. Capital markets can be divided into two segments: primary and secondary.

What are the capital market services? ›

A capital markets group may provide investment management services, lending services, equity sales and trading, research, consulting services, or any number of other types of financial services.

What is the structure of the capital market? ›

CAPITAL MARKET – STRUCTURE

Capital markets structure is made of primary and secondary markets. Secondary markets are places where the trade of already issued certificates between investors are overseen by regulatory bodies. Issuing companies play no part in the secondary market.

Who are the main suppliers of funds in the capital market? ›

Capital markets are composed of the suppliers and users of funds. Suppliers include households (through the savings accounts they hold with banks) as well as institutions like pension and retirement funds, life insurance companies, charitable foundations, and non-financial companies that generate excess cash.

Who are the providers of capital market services? ›

The different types of capital market service providers include investment banks, investment advisors, portfolio managers, brokerage firms, and custodians. Investment banks specialize in underwriting new securities offerings and raising money for companies through public offerings or private placements.

What are the different types of issuers? ›

There are many types of bond issuers:
  • Firms.
  • Governments.
  • Supranational Entities.
  • Regions and Municipalities.
  • Projects and SPVs.

What is an issuer under the securities Act? ›

(8) The term “issuer” means any person who issues or proposes to issue any security; except that with respect to certificates of deposit for securities, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a ...

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