Stocks and bonds are traded in the capital market. There are two types: the equity market, where stocks or equities are bought and sold, and the debt market, where fixed-income trading is done or bonds are bought and sold. The global capital market encompasses trading in all securities — stocks and bonds — across the worldwide financial markets.
There are various activities that occur in the capital markets, all of which are tools for corporations to generate profits either in the near future or over the long term. One way that companies accomplish this is to issue equity shares in either an initial public offering (IPO) or a secondary offering. By issuing shares or selling stocks, a company offers investors a chance to obtain an ownership stake in that corporation while also reaping profits from the sale.
An IPO represents the debut offering in which sales were made available to the public. A follow on offering in the capital marketplace represents an equity offering that unfolds after an IPO. A company might issue shares as a way to raise money for an acquisition or to fund an expansion or project. For example, a pharmaceutical company that is developing a new drug might need to raise capital in order to fund the expensive clinical trials.
An equity offering can help the company raise funds. A benefit for investors is that, after purchasing shares, they might be entitled to ongoing dividend payments, which are a bonus distribution made by companies as a reward to their shareholders. These payments are made in the form of cash or stock and typically are done on a quarterly basis.
There are also times when tapping the debt capital market makes sense. This market is a place where a company issues bonds or debt to the general public or to an institutional investor, such as an investment bank or hedge fund. Essentially, investors lend a company money by purchasing bonds. In turn, the investor receives ongoing interest payments on that security based on a predetermined interest rate and a final payment on the maturity date, or expiration date, of that bond. When interest rates are especially low in a region, it might make sense for a company to issue debt because it can borrow money more cheaply under that condition.