Part 1 Unit 5

FINANCIAL INSTRUMENTS

AND STOCK EXCHANGES

unit 5

Financial instruments and stock exchanges section 1 raising finance lead-in

Why does a company issue stock? Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will some day be worth more.

When companies raise finance by selling shares they make share issues, share flotations, or share offerings. The first sale of stock, which is issued by the private company itself, is called the initial public offering (IPO), or flotation. Company shares are listed or quoted on the stock market.

Companies making share issues and listed for the first time are floated on the stock market.

It is important to understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful. Just as a small business owner isn't guaranteed a return, neither is a shareholder. As an owner your claim on assets is lesser than that of creditors. This means that if a company goes bankrupt and liquidates, a shareholder doesn't get any money until the banks and bondholders have been paid out. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.

Although risk might sound all negative, there is also a bright side. Taking-on greater risk demands a greater return on your investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10%-12%.

There are two main types of shares (stocks): ordinary shares (common stock, equities) and preference shares (preferred stock).

When people talk about shares in general they are most likely referring to ordinary shares (common stock). In fact, the majority of stock issued is in this form. Ordinary shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid.

Preference shares represent some degree of ownership in a company but usually don't come with the same voting rights. (This may vary depending on the company.) With preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder (but still after debt holders).

Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.

Blue chip shares, blue chip stocks, or blue chips are the safest share investments in leading companies.

Companies looking for more finance may make a rights issue by offering new shares to existing shareholders at a discount. Rights issues are referred to informally by commentators as cash calls.

Buying warrants gives the right to buy a certain number of a company’s shares for a given price at a later date. Warrants are similar to rights issues except that holders usually have longer in which to exercise their right to buy shares.

VOCABULARY

shares, stocks (count.-BrE) stock (uncount. –AmE)	- акции: ценные бумаги, являющиеся титулом собственности на часть имущества компании
raise capital raise finance	- привлекать, мобилизовать капитал; получать, собирать средства
bond	- облигация: долговое обязательство, ценная бумага с фиксированной процентной ставкой, выпущенная правительством, государственной или частной компанией для получения финансовых средств на оговоренный срок
debt financing	- долговое [заемное] финансирование: финансирование путем привлечения заемного капитала (с помощью эмиссии облигаций или векселей, получения кредита в банке и т. п.), в отличие от привлечения средств путем выпуска акций либо финансирования за счет нераспределенной прибыли
equity financing	- акционерное финансирование, финансирование за счет акций
share issue	- эмиссия [выпуск] акций
public offering	- публичное предложение ценных бумаг, открытое размещение; предложение ценных бумаг широкому кругу инвесторов
initial public offering (IPO) flotation	- первоначальное публичное предложение акций: первый выпуск компанией своих акций на рынок (т. е. выпуск на первичный рынок акций новой компанией или компанией, которая преобразуется из закрытой в открытую)
float	- выпускать в обращение; размещать (ценные бумаги)
listed company quoted company	- котируемая компания (акции которой зарегистрированы на фондовой бирже)
principal	- основная сумма (сумма, на которую начисляются проценты)
interest payment	-выплата процентов
go bankrupt	-обанкротиться
liquidate	- ликвидировать (компанию)
dividend	- дивиденд: часть прибыли акционерного общества, подлежащая распределению среди акционеров
savings account	- сберегательный счет: счет в банке, приносящий проценты и предназначенный для хранения сбережений населения
ordinary share ordinary stock common stock common share	- обыкновенная [простая] акция: ценная бумага, подтверждающая участие в капитале компании и дающая право на часть капитала компании и часть ее прибыли после распределения среди владельцев облигаций и привилегированных акций, а также на участие в руководстве деятельностью компании через голосование на собраниях акционеров
preference share preferred share preferred stock preference stock	- привилегированная акция: акция, дающая владельцу преимущественное право на получение дивидендов и на часть капитала компании (в случае банкротства) по сравнению с обыкновенной акцией; имеет фиксированный размер дивиденда и обычно не дает права голоса
blue chip stocks blue chips	- «голубые фишки»: активно торгуемые первоклассные акции, риск снижения доходов по которым минимален; обычно это акции крупных, широкоизвестных компаний. Первоначально распространившееся в США, название произошло от цвета самых дорогих фишек при игре в покер.
blue chip company	- «голубая фишка», первоклассная компания: крупная солидная компания, известная своей надежностью, качеством товаров и услуг, стабильной прибылью, а также выплачивающая дивиденды
rights issue	- выпуск [эмиссия] прав: выпуск новых акций, предлагаемый акционерам компании по более низкой цене, чем рыночная
warrant	- варрант: свидетельство, дающее своему держателю право купить акции или облигации компании по определенной цене в течение определенного периода

COMPREHENSION QUESTIONS:

1. In what way do companies raise finance?

2. Which way is more advantageous for the company and why?

3. What is IPO?

4. What is the difference between financing through debt and financing through equity?

5. Why have stocks historically outperformed other investments such as bonds and

savings accounts?

6. What are the two main types of shares?

7. What is the difference between preference shares and ordinary ones?

8. What are blue chips? Give examples.

VOCABULARY PRACTICE

Businesses large and small need a capital market in which they can raise finance at the lowest possible cost.

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company.

IKEA, despite an estimated annual turnover of $2.5 billion, is still private and is not quoted on any stock market.

If you buy common stocks, you share directly in the success or failure of the company. If the company grows or realizes a profit, your income from the stock may increase, or the share price may climb. On the other hand, if the company goes bankrupt, you could lose your entire investment.

Preferred stocks reduce your risk — but also limit potential reward. The dividends paid on preferred stocks are fixed and guaranteed. You may even get some of your investment back if the company goes bankrupt. However, if the company grows or realizes a profit, your dividends stay the same and the share price increases more slowly than shares of the company’s common stock.

As Britain recovers from recession, companies will seek to raise finance through share issues. In the coming months, they will publish glossy prospectuses that celebrate their track records and invite people to part with their capital.

Under one scheme being considered, the Post Office would be floated (have its shares sold) on the stock market. This would rise up to $5billion for the government. Ministers are convinced that a flotation would be popular.