Capital market is a market where financial stocks and bonds are traded between business organizations and individuals. It is a market where business organizations involve selling financial securities to raise funds for their short and long term projects. The raising of capital funds may take different forms including;Initial Public Offering (IPO) where institutions sell part of their common stocks (in shares) to the public, issuing bonds, borrowing and issuing preferred stocks ((Gallatin Service, 1967). This paper looks at the alternative methods through which companies may raise funds in capital markets without engaging in IPOs.
There are alternative methods to raise funds in the capital markets. They include; issuing bonds that are funds borrowed from to be repaid at a specified date in the future. Bonds are advantageous in that they are secure securities that have a maturity date, and guarantee of payment. The bondholders are entitled to fixed interest payments on specified dates before the bond matures. Institutions prefer issuing bonds due to the low interest rates bonds carry in relation to the conventional bank loans (Gallatin Service, 1967).
Another method is the issue of preferred stock, which unlike, common stock they may be redeemed back by the company or attract some dividends from the profits made. The preferential shareholders dividend is paid after payments of interest to bondholders. This is borrowing borrow funds direct from the capital market using stocks with special status. This method finances their long term goals by getting loans from different sources as investment banks and wealthy individuals. The company uses their retained profits to finance their operational costs, after making substantial profits (World Bank., & Brown, 1979).
Business firms have options to raise capital funds. Bonds and preference shares are some of the ways that companies would raise their funds for long and short term objectives. These methods give favorable alternatives to selling part of the company’s stock through initial public offering (IPO).