Understanding Securities Markets and Corporate Finance
Securities Markets and Corporate Finance Operations
Financial assets are a means of maintaining wealth for the owner and a source of funding for those who issue them.
Classification:
- Fixed income financial assets: These contribute to long-term flows, such as bonds or obligations.
- Equity financial assets: These are uncertain, IQ-dependent flows that generate profits distributed by the company as dividends per share.
The Markets
Financial assets are traded in markets. The market is formed by all the markets where fixed income and variable income securities are issued or traded. These are divided into:
- Primary market: Where a company issues securities to be subscribed by investors, achieving funding.
- Secondary market: This is a pure market where previously issued securities are bought and sold. Buying shares or bonds already in circulation are examples of secondary market operations.
Differentiate:
- Initial Public Offering (IPO): An operation in which firms offer a portion of their shares for sale. The share capital merely changes hands.
- Public Offering of Securities (OPS): This results in newly issued shares, increasing capital.
For the securities issued by companies to be attractive compared to other options, the investor must ensure:
- Yield: This will manifest as interest in the case of fixed income securities or through dividends and value in the case of variable income securities.
- Security: This is related to the probability of obtaining the expected performance.
- Liquidity: This guarantees that an investor can exchange the titles for cash when needed.
The Bid
A bid is an operation in which one or more individuals or companies offer to purchase shares and public debt securities from the shareholders of a listed company.
Stock Exchange
The stock exchange is the only market where shares of companies and other financial assets, such as bonds, are traded. Companies decide to issue a product depending on their needs and the commitment they want to make with the money of savers. The stock exchange increases the price of a company through a number of channels, for example, to qualify for a capital increase with disbursement, liquidity is provided by the former shareholders if the company decides to make a public offer to capitalize on sales.
Advantages and Disadvantages of Trading Stock
- Advantages: Lower financing costs compared to other sources, potentially much higher financing, and better public image of the company.
- Disadvantages: The issuance of shares could lead to a loss of power in the company by the founding shareholders. Companies are subject to external audits and must provide regular information to shareholders and the stock exchange. Shares could end up in the hands of unknown or unwanted individuals by the founding shareholders.
Selection of the Source of Funding
The selection of the source of funding depends on several factors:
- Type of investment: In the case of a fund for current assets, the source of funding may be short-term, while if it is a target linked to the company for over a year, the source of funding should have a repayment period of more than one year.
- Desired degree of indebtedness: If the company wants to reduce its degree of indebtedness, it must seek its own sources of funding. External sources are used if the company wants to increase its financial income.
- The cost of financing: Long-term sources tend to have a higher cost than short-term sources.
Once the return period is determined, the criterion to determine the source of funding will be the cost. The company will select the source of funding that has the lowest cost because this helps to achieve the ultimate goal of increasing profits and lowering costs.