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Understanding the Four Quadrants of the Capital Market

Updated: Nov 29, 2023

Investing is a powerful tool that allows us to shape our financial future, but navigating the complex world of finance can be overwhelming. That's why understanding the capital market and its different quadrants is essential. In this article, we'll explore the four main quadrants of the capital market—the Stock Exchanges, Initial Public Offerings (IPOs), Private Placements, and Mergers and Acquisitions—to empower and equip you with the knowledge you need. Additionally, we'll highlight the significance of the Jobs Act in creating opportunities for non-accredited investors to participate in private placements.

Understanding the Primary and Secondary Markets

When it comes to investing and capital raising, it's important to understand the difference between the primary and secondary markets. Think of the primary market as the place where new securities are first issued. This is where companies, startups, and even governments raise funds by offering investors stocks, bonds, or other financial instruments for the first time. It's like being part of the beginning of an exciting journey, investing in a company's potential growth.

On the other hand, the secondary market is where already-issued securities are traded among investors. It's like a bustling marketplace where people buy and sell stocks, bonds, and other financial instruments. The secondary market provides liquidity, allowing investors to exit their investments or adjust their portfolios based on changing market conditions.

Understanding these two markets' differences is essential because it helps you navigate the investment landscape and make informed decisions that align with your goals.

Understanding Capital Markets

Capital Quadrant - Understanding Capital Markets

Stock Exchanges: The Vibrant Marketplace (Secondary Public Market)

Let's start with the upper right quadrant—the stock exchanges. Most of us are familiar with this quadrant, where we buy and sell stocks through the regulated SEC. Here, investors have access to a wide range of publicly traded stocks, from blue-chip companies to exciting newcomers. You might not know that our stock investments generally don't go directly to the company we invest in; in most cases, our money goes to the person selling the stock.

The main stock exchanges are the NYSE and NASDAQ.

Initial Public Offerings (IPOs): The Journey to Going Public (Primary Public Market)

Ever wondered how a private company becomes publicly tradable? Through Initial Public Offerings (IPOs), companies make their debut on the stock exchanges. This happens in the lower right quadrant. IPOs are exciting because they provide an opportunity to directly invest in a company's potential growth early on. However, spoiler alert: most of the time, Wall Street banks manage this process. They buy stocks in bulk and then turn around and sell it to the public on the stock exchange.

Common avenues for other activity in this quadrant include the initial issuances of stock, corporate and Government bond offerings, and additional issuances for already-public companies doing subsequent rounds of new capital raising. These are often called a follow-on public offer (FPO).

Private Placements: Expanding Opportunities for All (Primary Private Market)

So what about the vast majority of companies that aren't publicly tradable? This is where private placements in the lower left quadrant come in—they offer a gateway to invest in emerging private companies. Private companies can raise capital from non-accredited investors through specific exemptions regulated by the SEC. Angel investors and venture capitalists often participate, injecting funding into early-stage ventures. This quadrant provides an opportunity to support promising businesses and nurture innovation.

There are several SEC exemptions used by private placements to raise capital, depending on their needs.

Mergers and Acquisitions: Uniting for Shared Success (Secondary Private Market)

The last quadrant in the upper left corner is mergers and acquisitions (M&A). In the fast-paced world of business, companies sometimes join forces to achieve shared success. M&As occur in the secondary market as mature or maturing companies buy or merge with one another. Private equity firms and venture capital play a pivotal role in driving these transactions, providing the necessary funding and expertise to create thriving partnerships.

Opportunities for Non-Accredited Investors: The Jobs Act

Fun fact: Did you know that 99% of companies in America are private? This means that the companies that most of us buy and sell stock in that have gone public in the public stock exchanges only represent 1% of the companies out there. Until recently, with a few exceptions, you have to be an accredited investor (generally, you need to have a million dollars in net worth or over $200,000 in income - see link for more) to invest in private companies. Only 11% of US households qualify as accredited investors, leaving the remaining 89% of us underrepresented in private company investing opportunities.

Now, here’s the good news. The Jobs Act, signed by President Obama in 2012, created new exemptions, including regulation crowdfunding (Reg CF), allowing non-accredited investors to participate in private placements. This new development levels the playing field and expands investment opportunities for everyone, not just the wealthy.

Using The Capital Quadrant To Start Your Investing Journey

Understanding the four quadrants of the capital market is crucial for building a solid investment strategy. Armed with this knowledge, you can make informed decisions and play an active role in shaping your financial future. The Jobs Act has been pivotal in fostering inclusivity and providing opportunities for non-accredited investors to participate in private placements, leveling the playing field and empowering individuals like never before.

Are you ready to explore private placements and discover how you can support promising businesses you believe in and foster economic development? Download our whitepaper: Alternative Investments for the Rest of Us.

Alternative Investments For The Rest Of Us - Private Placements 3.0 - Folla Capital Whitepaper

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