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‘Capital markets’ might be an unfamiliar term to many, especially if you are just deciding on a career in commercial law. Capital markets are where savings or investments move between suppliers (who have capital to spend) – banks and investors typically, and seekers of capital – businesses and individuals, typically. Capital markets can be primary or secondary. The primary capital markets are those where new securities are issued and sold. The secondary market is where previously issued securities are traded between investors.The most common capital markets are the stock market and the bond market. Capital markets improve transaction efficiency by bringing together those who need capital and those who provide it. If you want to work in capital markets, you will need to understand how they operate, and what your career might be like.
Lawyers in capital markets will carry out due diligence, or DD, on issuers of securities, and create prospectuses which provide information for those looking to invest. They will also be tasked with processing the approval of a listing on a stock exchange, like the NYSE or the London Stock Exchange. This is a complex process that requires extensive documentation to show that a company complies with listing requirements. When a company IPOs, it is subject to a fresh set of rules – as it is now a publicly held company – and therefore capital markets lawyers will need to do extensive work with the company prior to its listing. Capital markets lawyers will be involved in the issuing of bonds and derivatives as well.
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Capital markets can be ‘real world’ or virtual. In all capital markets, you will find issuers – those who are providing shares of their company for sale – and underwriters, the investment banks that provide capital. Remember that companies can receive financing through equity (selling shares) or debt financing (borrowing money from a bank).
The equity capital markets are perhaps the best known. These markets are where private companies become public, through an IPO (initial public offering) and where the public can then buy shares. The most influential and well-known stock exchanges are the NYSE (New York stock exchange), the NASDAQ (also a US exchange) , the Shanghai Stock Exchange, Euronext, Japan Exchange Group, Hong Kong Stock Exchange, Shenzhen Stock Exchange, and the London Stock Exchange (LSE). Note the rate at which China is beginning to exert economic power, and the representation of Asia throughout the list. In an equity capital market (better known as a stock market) the price of shares is determined by the public interest in a share.
Debt capital markets allow borrowers to sell bonds to investors. These bonds can be traded by investors. The bond is an agreement whereby the investor agrees to finance the company to a set amount, and the company agrees to pay back the investor with interest.
Structured finance is another area that you should be aware of. Structured finance provides large financial institutions or companies with special products that suit their needs – collateralized debt obligations, synthetic financial instruments, and collateralized bond obligations are some examples. Note that traditional lenders do not provide structured financing. Structured financial products cannot be transferred from one party to another.
The last area to know about is derivatives. A derivative is a financial contract of which the value is set by an underlying asset or group of assets. Derivatives can trade both on exchanges and over the counter (i.e. in private).
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Capital markets lawyers will be almost entirely based in the City in the UK. The largest firms have teams focused only on capital markets. Expect to work very long hours if you choose this field. Your clients will be high-powered and therefore expect high performance and dedication from you. Remember that you will be very much at the whim of the markets – fears about an incoming bear market could scupper a deal that you have been working hard on, whilst a bull market could see deal-making become easier. You’ll benefit from very generous pay packages, the excitement of a high pressure job, and the chance to meet clients from the outset, and make great connections within investment banks. Due to the nature of the job and the long hours, you should feel part of a tight-knit team.
