Capital markets: ECM and DCM
By Michael Song · Wharton MBA · ex-Greenhill · investment banking interview coach
15 min read · updated August 15, 2026
Every company eventually needs cash it doesn't have yet: a factory to build, a competitor to buy, a balance sheet to shore up. It has exactly two ways to get outside money: sell a piece of the company, or borrow. Sell a piece and you're in equity capital markets. Borrow and you're in debt capital markets. That fork is the whole of capital markets, and beginners who think banking is all M&A miss a huge, separate business interviewers expect you to know cold.
The two doors: equity vs. debt
Equity capital markets (ECM) raises money by selling ownership. The company issues new shares, investors buy them, and those investors become part-owners: they vote, share in the upside, and get paid last if things go wrong.
Debt capital markets (DCM) raises money by borrowing. The company issues bonds, but a bondholder is a lender, not an owner: they get a fixed coupon and their principal back on a set date, they get paid before shareholders, and they don't vote or share in the upside.
The trade in one table:
| Equity (ECM) | Debt (DCM) | |
|---|---|---|
| What you sell | Ownership (shares) | An IOU (bonds) |
| Investor gets | Upside + voting rights | Fixed coupon + principal back |
| Company obligation | None guaranteed | Must pay interest and repay |
| Ownership diluted? | Yes | No |
| Paid back first? | Last in line | Ahead of equity |
| Cost to the company | Higher | Lower |
Debt is cheaper than equity. A lender takes less risk, so they demand a smaller return, and interest is tax-deductible on top of that. Equity investors are last in line, so they demand the highest return. That gap between cost of debt and cost of equity is why most companies carry some debt.
What ECM actually does
ECM raises equity. The headline product is the initial public offering (IPO), where a private company sells shares to the public for the first time. But ECM does more than IPOs: a public company can sell more stock in a follow-on offering, raise money through convertible bonds (debt that can turn into equity), or run a rights issue that lets existing shareholders buy more. The banker's job here is less about models and more about reading the market: pricing the deal and timing the window, which is wide open when stocks are flying and slams shut when markets turn ugly.
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Frequently asked
- What is the difference between ECM and DCM?
- ECM, equity capital markets, helps companies raise money by selling stock, such as an IPO or a follow-on. DCM, debt capital markets, helps them raise money by issuing bonds. Equity sells ownership; debt is borrowed and repaid with interest. Both sit inside the bank's capital markets group.
- What is underwriting in investment banking?
- Underwriting is when a bank commits to buy a company's new securities and resell them to investors, putting its own capital at risk if the sale falls short. The bank is paid a spread for taking that risk and effectively guaranteeing the company gets its money.
- How does a company decide between issuing debt and equity?
- Debt is cheaper and does not dilute ownership, but it must be repaid and adds risk if cash flow drops. Equity never has to be repaid but gives up ownership and upside. Companies weigh cost, how much debt they already carry, and how much risk their cash flows can support.
- What is a greenshoe or over-allotment option?
- The right for underwriters to sell up to 15% more shares than the deal size, usually for 30 days after pricing. They sell 115% of the deal, then either exercise the option if the stock trades up, or buy shares back in the open market if it trades down, which supports the price. It is both an upsize option and the mechanism behind stabilisation.
- What are the steps of an IPO?
- A bake-off to pick banks, then an organisational meeting, due diligence and drafting of the S-1, a confidential SEC filing and comment rounds, testing the waters with investors, the public flip and launch with a price range, a one to two week roadshow with bookbuilding underneath it, pricing the night before trading, allocation of an oversubscribed book, and then trading with a 30 day stabilisation window and a 180 day insider lockup.
- How does equity research interact with ECM on an IPO?
- Coverage is part of what a company buys when it picks its banks, because the syndicate's analysts will initiate on the stock afterwards. But research is separated from banking by an information barrier: analysts cannot help win the mandate, cannot be promised coverage in a pitch and are not paid for the deal. Bankers arrange a teach-in where management presents to the analysts, then stay out of it, and the banks on the deal cannot publish until the quiet period ends.