Understanding Financial Instruments: Indexes, Equity & More
Understanding Key Financial Concepts
An index is a group of securities chosen to track a particular investment theme such as a market, asset class, sector, industry, or even strategy. Generally, the goal is to accurately represent the risk/return profile of that theme without necessarily holding every security that might qualify. Indexes can be used in a variety of ways:
- To assess a given market’s performance
- To gauge how well an active strategy is working
- To serve as the foundation for investment products, such as ETFs or mutual funds
- To evaluate a market’s risk profile or its diversification benefits
Why List on a Stock Exchange?
Companies “list” on a stock exchange for raising capital for expansion or investing in new business projects or ventures. Institutions list their securities and bonds on an exchange for ease of trade.
Pros: Access to new capital for growth, enhanced liquidity and image, increased employee commitment.
Cons: Costs, less flexibility in major decisions, sharing financial gain and strategic information, etc.
Venture Capital
Venture capital is a kind of private equity, a form of financing companies. It is provided to start-up companies and small businesses that are expected to grow in the long term.
Private Equity Funds
Private equity funds are a kind of investment fund dedicated to high-growth pre-IPOs, companies in a mature stage, which have a certain scale of business and a stable cash flow.
Crowdfunding
Crowdfunding consists of raising capital by taking advantage of the sum of small amounts of money owned by a large pool of individuals, which together can become a considerable source of cash.
Leasing
We can define leasing as a contract (written or implied) whereby an owner, called lessor, of a specific asset such as equipment, machine, land, building…
Why Leasing? Purchase power, reach more easily.
Balance sheet management, 100 percent financing, proven equipment-financing option; service additions like installation and maintenance; tax treatment; upgraded technology; specialized assistance in the sector; flexibility; asset management.
Family Owned Businesses
Pros: Longevity, stability and security, long-term perspective, values, quicker decisions, high efficiency, lower labor cost.
Cons: Rivalry, conflicts worsen, old processes, company’s reputation, more vulnerable, power and positions controlled in the family.
State Owned Companies
For Employees:
Pros: Medical care, holidays, job stability.
Cons: Low increase in salaries, not much innovation, negative work attitude.
For Suppliers:
Pros: Big orders, sure to get paid.
Cons: Bribery and corruption, no effective negotiation.
For Clients:
Pros: Often lower prices than other companies would charge.
Cons: Strikes, lack of competition.
For Managers:
Pros: Less pressure, easier to get bank loans.
Cons: Government control, political pressure.
Government Help
Direct: Subsidies are strictly regulated by the WTO, so they still exist but for small amounts, tax breaks or tax deductions, lower social charges, collateral (for loans), purchase orders (cars, uniforms…), diplomacy, laws & regulations (quality, security) technical specificities, providing infrastructure, land, buildings, administrative help: incubators, consulting…