Methods of raising funds from capital markets
A capital market is for investing funds in debentures, shares, bonds, etc. of companies. Investors can invest their funds in a safe and profitable manner through stock exchanges. Method of accessing means a way of getting to a place. Firms and institutions can raise medium and long-term funds by way of tradable securities and non-tradable securities.
Methods of Accessing funds from capital markets are given in the diagram below. ↓
Image credits © Manoj Patil.
How to raise cash in capital markets are given below: ↓
- Public issue,
- Rights issue,
- Private placement,
- Offers for sale,
- Venture capital,
- International issues,
- Bonds issued by financial institutions,
- Obtaining term loans.
Methods of raising long-term funds by firms and institutions are as follows: ↓
1. Public Issue
In a capital market, company can borrow funds from primary market by way of public issue of shares and debentures. To manage its issue a company can take the help of merchant bankers. The cost of raising funds through public issue is high as compared to other methods.
2. Rights Issue
In capital market, rights issue means selling securities in primary market by issuing shares to existing shareholders.
3. Private Placement
The capital issue is sold directly to a small group of investors. Mainly institutional investors like insurance companies, banks, mutual funds, few private investors, etc.
4. Offers for Sale
In a capital market, the company sells the entire issue of shares or debentures to an issue house or merchant banker at an agreed price, which is normally below the par value. The shares or debentures are then resold by issue house / merchant bankers to be public.
5. Venture Capital
It is an important source of funds for technology based industries and new projects that find it difficult to raise funds directly from capital markets. In the period of 3 to 5 years, the venture capital tries to liquidate all its investment in the collaborative firm.
6. International Issues
Indian firms can raise funds from international markets through: Depository Receipts (GDR) from worldwide markets, Foreign-Currency Convertible Bonds (FCCB), American-Depository Receipts (ADR) from American markets. However, only large firms are in a position to raise funds from global markets.
7. Bonds Issued by m Institutions
There are various types of bonds issued by Financial Institutions.
Bonds issued by financial institutions are:
- Retirement bonds,
- Growth bonds,
- Regular income bonds,
- Index bonds,
- Step-up liquid bonds etc.
8. Obtaining Term Loans
In capital market, companies can additionally raise long term cashes by obtaining long-term loans, mostly from financial institutions. Term loans are also referred to as ‘term finance.’ Which represent a source of debt finance and is generally repayable in more than one year but less than 10 years.