Financial Instruments

Financial Instruments

Corporations need capital to finance business operations. Financial instruments are assets that can be traded. They can also be seen as packages of capital that may be traded.

Financial instruments can be classified into:

•Debt (or Fixed Income)
Financial Instruments

Equity:- A company’s equity typically refers to the ownership of a public company. For example, investors might own shares of stock in a publicly traded company.

There are two types of equity:
•Common stock
•Preferred stock

Bonds, Debt (Fixed Income) :- The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.

Hybrids:- A hybrid security is a single financial security that combines two or more different financial instruments. Hybrid securities, often referred to as “hybrids,” generally combine both debt and equity characteristics.

Different Type of Equity Issues

Different Type of Equity Issue

In this article we will see the different type of Equity Issues and their details. Below are the most common  type of issues.

1. New Issue (IPO)
2. Right Issue
3. Bonus Issue
4. Private Placement
Different Type of Equity Issue1.New Issue(IPO):

IPO is the way a firm goes public and sells shares to raise capital. To understand the IPO better I will introduce another term Authorized Share Capital.

Authorized Share Capital: – It is the maximum amount of capital which can be issued by a company.The authorized capital can be increased by the company at any time with shareholders’ approval and by paying additional fee to the Registrar of Companies. For more details  click here  to access an external.

Before listing, a Company needs to satisfy the prerequisite defined by the respective Primary Market. For more details you can refer NSE website.

A company can only liquidate its share up to Authorized Share Capital and if it want to liquidate further needs to increase its Authorize Share Capital with the help of Registrar of Company.

2. Right Issue:

Right issue is subsequent issue of shares by company to its existing shareholders in the proportion of their holdings. Right issues is allowed only if Company is having sufficient Authorized Share Capital.

Right issues are generally offered at a price below the current market price. Right holders have option either to exercise the right or sell the right to another person. In the right issue company save the charges of broker and underwriter.

3. Private Placement:

Private placement is a capital raising event that involves the sale of securities to a relatively small number of select investors. Investors involved in private placements can include large banks, mutual funds, insurance companies and pension funds. A private placement is different from a public issue in which securities are made available for sale on the open market to any type of investor.

4.Bonus Issue:

Bonus shares are shares distributed by a company to its current shareholders free of charge. Bonus helps company to retain the cash and provide the benefits to the shareholders.

Financial market- Investment Banking Series 1/10

Financial Market, Capital market

                                                            Financial market

I am planing to cover the concepts of Investment banking in a series of ten posts. This first post will cover the

introduction of Financial Market, Money Market, Capital Market, Primary and Secondary Market

A financial market brings buyer and seller together to trade in financial assets/instruments such as Stocks, Bonds, Commodity, Derivative and Currencies.

The purpose of a financial market is to provide platform for Global trading, raise Capital, maintain Liquidity and to Transfer risk between counter-parties .Financial Market, Capital marketTwo most important category of financial market are :

  1. Money Market
  2. Capital Market

  Money Market

Money market use to trade on short term basis, usually for the assets maturity upto one year.

Capital Market

Capital Markets are used for long term assets with maturity more than one year. Capital markets includes Equity and Bond Market.

Money Market

Money Market – Liquidity is main purpose for using Money Market. Short term Debt is used for the purpose of covering Operating Expenses or Working Capital for a company or government.

We don’t consider money market for the purpose of Capital Improvement or large projects.

The Money Market is very important for the Corporate and Government as it plays an important role in maintaining the appropriate level of liquidity on daily basis without failing short, without holding excess funds and missing the opportunity of gaining intent on funds. Investors use the money markets to invest the fund in safe manner. This is because the participants of Money Market are big players with high credit worthiness.

For Example:

If ICICI bank needs money for a week they can take a short term loan from other bank like HDFC, SBI or any other bank. The money can be borrowed   for 1 day to 1 year. As two stable banks are the counterparties probabilities of default is very less.

Capital Market :

Capital markets are used for long term assets having maturity more than a year which includes equity and Bond market.

On the basis of nature of trade it can categorized in two types :

  1. Primary
  2. Secondary

Primary Market

  1.  Where new equity Stocks or bond issued for the first time are sold to the investors.
  2.  Trade happens between Issuer(Company) and the Investors. For example if DMART is offering IPO Trade will happen between Dmart and the retail Investors.
  3. Trade in Primary Market directly impacts the Capital of the company.

Secondary Market

  1. Secondary Market is a place where primary market instruments, once issued, are bought and sold.
  2. Trade happens between two counter-parties which does not include the Issuer unless its a buyback.
  3. Share price in secondary market have no direct impact on company Capital.