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Overview of financial markets(2) - Coggle Diagram
Overview of financial markets(2)
Other commercial stocks
Commercial paper(CP)
An IOU issues by the company when a company wants to raise short term money
Traded often at a discount reflecting the yield required
CP is risky therefore a firm's CP given credit rating by third party agency to access its risk ,large company restrict investment in CP
Loan stoks
Issued in return for loans secured on a particular asset of the business
The factory may be offered as security
The holder takes priority over other creditors when a business is wound up
Bonds
A term given to any fixed interest security,whether it be issued by the government, a company, a bank or other institution
Business also issue bonds and ususally for long term,they may or may not be secured.
Convertibles and warrants
Convertibles securities
Classification of debt
Non convertible debt :cannot be converted to ordinary
Partly convertible debt :only part pf the instrument can be converted into ordinary share
Fully convertibles debt :can be fully converted to equity shares at the issuer's notice
Features of convertible debt
Considered as part debt and part ordinary debt
Has characteristic of debt instrument and ordinary shares
Cannot be converted back into its original form after conversion
A security e.g. debenture,bond,preferred stock that can be exchanged for another securities
Warrants
A right to buy new ordinary shares in a company at a future date,at a exercise price
Attached with loan notes/available to holder of debt security with which the warrants are issued
Purpose of issuing warrants
Value of warrant lies in the potential for future capital gain
Useful for companies because they make their loan nktes more attractive to lenders
As a 'sweetener' allowing the companies to pay lower rates of interest
However,the debt security holder can detach the warrants and sell them in the market
Features of warrants
Loans more attractive with a'sweetener'
Offer capital gain to investors
Company receives cash when an investor decided to convert his warrant into an ordinary shares
Ordinary shares
Standard shares with no special rights or restrictions
Features of ordinary shares
Contain the controlling powers of the company
Not entitled to fixed dividends
Shareholders appoint the BOD of the company which runs the affairs with the help of the executive director and managers
Purpose if issuing ordinary shares
No legal obligation to pay dividends,thus company can skip dividend payment until the project starts generating adequate surplus
Constitute the basis for raising debt
No ability of repayment,thus a source of permanent capital
Preferences shares
Types of preferences share
-
Cumulative
:the right to received dividend is carried forward next year
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Non cumulative
:Do not provide this right,dividend for that year is lost
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Participating
:shareholders are entitled to participate in the rpofit over and above the stipulated minimum in addtion to their fixed dividend
-
Redeemable shares
:Company agrees with the purchase to buy back at future date
-
Convertible shares
:can exchange their shares for another class of shares
Features of preferences share
Preferentianal right to dividend
Preferentianal right as capital repayment
Do not have right to vote at AGM
No dividend paid when company incurs losses
Purpose of issuing preference share
With no voting rights,ownership and control is not diluted
Not secured,thus assets are free to be offered as a security for debt
Carry a guaranteed rate of dividend,thus less risky than ordinary shares
Shares which have a fixed percentage dividend,payable in priority to any dividend paid to the ordinary shareholders