In this article, we will provide a general overview of the key players and their respective roles in the capital markets. The capital markets consist of two types of markets: primary and secondary. This guide will provide an overview of all the major companies and careers across the capital markets.
Primary vs Secondary Markets
In the primary market, there are four key players: corporations, institutions, investment banks, and public accounting firms. Institutions invest capital in corporations that seek to expand and grow their businesses, while corporations issue debt or equity to institutions in return for their capital investment. Investment banks are hired to match institutions and corporations based on their risk profile and investment style.
Finally, public accounting firms are responsible for the preparation, review, and auditing of financial statements, tax work, consulting on accounting systems, M&A, and capital raising. Hence, public accounting firms in the primary market not only assist corporations to raise capital but also help prepare, review, and audit financial statements to ensure a fair representation of their financial performance.
While the issuance of new bonds and new shares in exchange for capital occurs in the primary market, the secondary market is for the sale and trade of previously issued bonds and shares. Buyers and sellers engage in transactions on an exchange, while investment banks facilitate this process by providing equity research coverage. This ability to freely sell and trade securities significantly increases the market’s liquidity.
In the capital markets, corporations behave as operating businesses that require capital to grow and run their operations. These corporations can vary in industry, size, and geographical location. Careers at corporations that relate to the markets include corporate development, investor relations, and financial planning and analysis (FP&A).
Examples of publicly traded corporations:
2. Institutions (“Buy Side” Fund Managers)
Institutions consist of fund managers, institutional investors, and retail investors. These investment managers provide capital to corporations that need the money to grow and operate their businesses. In return for their capital, corporations issue debt or equity to the institutions in the forms of bond and shares, respectively. The exchange of capital and debt or equity completes the cycle of the two key players in the capital markets.
Examples of top “Buy Side” Firms:
The Carlyle Group
Apollo Global Management
3. Investment Banks (“Sell Side”)
Acting as an intermediary, investment banks are hired to facilitate deals between corporations and institutions. The job of investment banks is to connect institutional investors with corporionss, based on risk and return expectations, and investment styles. Careers in investment banking involve extensive financial modeling and valuation analysis.
Depending on their divisions, public accounting firms can engage in multiple roles in the primary market. These roles include financial reporting, auditing financial statements, taxes, consulting on accounting systems, M&A advisory, and capital raising. Therefore, public accounting firms are usually hired by corporations for their accounting and advisory services.
Examples of top public accounting firms:
Ernst & Young
Key Players in the Secondary Market
Unlike the primary market, where there is an initial issuance of debt or equity in exchange for capital, the secondary market allows for the sale and trade of issued bonds and shares. The secondary market allows players to enter and exit securities easily, making the market liquid.
In the secondary market, fund managers or any investors who wish to purchase securities or debts will have to locate a seller. Transactions are facilitated through a central marketplace, including a stock exchange or over the counter (OTC).
2. Investment Banks
While investment banks facilitate the issuance of bonds and shares in the primary market, they expedite the sales and trading of issued debts and equities between buyers and sellers in the secondary market.
Investment banks provide equity research coverage on each stock’s upside potential, downside risk, and rationale to help buyers and sellers make a judgment. Moreover, investment banks sell and trade securities on behalf of the clients to maximize their profits.
Capital Markets Recap
In this article, we explored the key players in the capital market and their responsibilities. The capital market can be broken down into two separate markets – primary and secondary.
In the primary market, institutions invest capital in corporations that seek to grow and operate, while corporations issue debt or equity in return. Investment banks act as advisors for institutions and corporations on mergers and acquisitions (M&A) and initial public offerings (IPO). Public accounting firms provide accounting and advisory services to the key players.
The secondary market involves the sale and trading of issued bonds and shares in a centralized marketplace. Investment banks offer their sales, trading, and research services to help buyers and sellers make decisions on their securities.
Thank you for reading CFI’s guide on Key Players in the Capital Markets. To expand your financial knowledge, see the following CFI resources: