The U.S. Financial Markets and the Role of Investment Bankers

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Private sources of funds
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The capital markets offer companies many different ways to raise funds from many different investors, including individuals and large institutions.

The first options an entrepreneur explores are private sources of funds. This part of
the capital markets may provide limited amounts of money, but allows companies to remain privately held and founders to retain control over their operations.

1. One private option is a corporate loan or line of credit from a bank. The process of qualifying is similar to what you might be familiar with if you've arranged a mortgage or large loan.
Based on a company's financial history and prospects, a bank may determine that the company is likely to repay the loan plus interest and advances the company the money.

2. Another private option is to tap friends and family ? private individuals who have some affiliation with the company or its officers and are willing to take investment risk for a share of
future profits.

3. A third choice is venture capital, or the assets of private investors channeled through a professional investment firm that may add funds to a start-up or maturing company in
exchange for a piece of ownership, some say over operations, and a share in the profits.

Public sources of funds
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When companies need a greater amount of capital than their earnings or private sources can provide, they may turn to the public capital markets. In the U.S., that means going to
Wall Street ? shorthand for the financial markets.

Issuing stock and bonds are the primary public ways of raising capital. A company that issues stock sells shares of ownership in the company and becomes publicly held. That
means the company has a fiscal responsibility to its shareholders, who have a vote in
how the company is run and a right to benefit from the company's success.

Once a company is publicly held it can also issue bonds to borrow money from
investors, taking on the responsibility to repay the capital at some point in the future
and pay interest for its use.

Public sources of funds in the capital markets generally involve far greater sums than
private sources. But using this money means that a company takes on a number of new
responsibilities in exchange for the cash infusion.

In the technical definition, the term capital ...