Financial Markets and Assets
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This article covers how companies raise money. As we discussed, this can be done by issuing stocks and bonds. Of course, those are not the only ways for a business to raise capital. Another option is borrowing from banks. There is an ongoing debate as to whether traded loans should be considered debt securities or not. For loans to be considered tradable debt instruments, the following criteria need to be considered:
- "Loans which have become negotiable de facto should also be classified under securities other than shares" [1993 SNA (para. 11.75)]
- "Loans that have become marketable in secondary markets should be reclassified under securities other than shares and should be valued on the basis of market prices or fair values in the same manner as other types of securities other than shares" [GFSM 2001 (para. 7.111)].
How do bonds differ from bank loans?
Glossary
- bills: short term (less than one year) debt instruments
- bond: a financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that it borrowed and also a rate of interest over a period of time in the future; usually long-term (greater than 10 year) debt instruments
- bondholder: someone who owns bonds and receives the interest payments
- capital gain: a financial gain from buying an asset, like a share of stock or a house, and later selling it at a higher price
- corporation: a business owned by shareholders who have limited liability for the company's debt yet a share of the company's profits; may be private or public and may or may not have publicly-traded stock
- debt instruments: IOUs
- dividend: a direct payment from a firm to its shareholders
- equities or stocks: ownership in a private company (unlike debt which conveys no ownership)
- financial markets: marketplace where money is invested and borrowed, or in other words, where securities are traded
- initial public offering (IPO): original sale of stock by a corporation
- mutual funds: funds that buy a range of stocks or bonds from different companies, thus allowing an investor an easy way to diversify
- notes: intermediate term (1-10 year) debt instruments
- private company: a firm owned by the people who run it on a day-to-day basis
- public company: a firm that has sold stock to the public, which in turn investors then can buy and sell
- securities: synonym for financial assets, or a certificate or other financial instrument that has monetary value and can be traded. These can be debt securities like bonds or equity securities like stocks.
- shareholders: people who own at least some shares of stock in a firm
- shares: a firm's stock, divided into individual portions
- sole proprietorship: a company run by an individual as opposed to a group
- stock: a specific firm's claim on partial ownership
- Treasury bond: a bond issued by the federal government through the U.S. Department of the Treasury
- venture capital: financial investments in new companies that are still relatively small in size, but that have potential to grow substantially