Finance/Investing
Financial markets provide their participants with the most favorable conditions for purchase/sale of financial
instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within
establishing proposition and demand and decreasing of operational expenses, incurred by the participants
of
the market.
Financial market comprises variety of instruments, hence its functioning totally depends on instruments held.
Usually it
can be classified according to the type of financial instruments and according to the terms of instruments’
paying-off.
From the point of different types of instruments held the market can be divided into the one of promissory
notes and
the one of securities (stock market). The first one contains promissory instruments with the right for its
owners to get some fixed amount of money in future and is called the market of promissory notes, while the
latter binds the
issuer to pay a certain amount of money according to the return received after paying-off all the promissory
notes
and is called stock market. There are also types of securities referring to both categories as, e.g.,
preference shares and converted bonds. They are also called the instruments with fixed return.
Another classification is due to paying-off terms of instruments. These are: market of assets with high
liquidity
(money market) and market of capital. The first one refers to the market of short-term promissory notes with
assets
age up to 12 months. The second one refers to the market of long-term promissory notes with instruments
age surpasses 12 months. This classification can be referred to the bond market only as its instruments
have fixed expiry date, while the stock market’s not.
Now we are turning to the stock market.
As it was mentioned before, ordinary shares’ purchasers typically invest their funds into the company-issuer
and
become its owners. Their weight in the process of making decisions in the company depends on the
number of shares
he/she possesses. Due to the financial experience of the company, its part in the market and future potential
shares
can be divided into several groups.
1. Blue Chips
Shares of large companies with a long record of profit growth, annual return over $4 billion, large
capitalization
and constancy in paying-off dividends are referred to as blue chips.
2. Growth Stocks
Shares of such company grow faster; its managers typically pursue the policy of reinvestment of revenue
into further
development and modernization of the company. These companies rarely pay dividends and in case they
do the
dividends are minimal as compared with other companies.
3. Income Stocks
Income stocks are the stocks of companies with high and stable earnings that pay high dividends to the
shareholders.
The shares of such companies usually use mutual funds in the plans for middle-aged and elderly people.
4. Defensive Stocks
These are the stocks whose prices stay stable when the market declines, do well during recessions and are
able to minimize risks. They perform perfect when the market turns sour and are in requisition during
economic boom.
These categories are widely spread in mutual funds, thus for better understanding investment process it is
useful to keep in mind this division.
Shares can be issued both within the country and abroad. In case a company wants to issue its shares
abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks
and point at shareholders’ right to possess the shares of a foreign company under the asset management
of a bank. Each ADR signals of one or more shares possession.
When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends.
They
depend on: type of share, financial state of the company, shares category etc.
Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on its profitability
and spare
cash. Dividends differ from each other as they are to be paid in a different period of time, with the possibility
of
being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when
a company
is in a financial distress or in case executives decide to reinvest income into the development of the
business. While
calculating acceptable share price, dividends are the key factor.
Price of ordinary share is determined by three main factors: annual dividends rate, dividends growth rate
and discount
rate. The latter is also called a required income rate. The company with the high risks level is expected to
have high
required income rate. The higher cash flow the higher share prices and versus. This interdependence
determines assets value. Below we will touch upon the division of share prices estimating in three possible
cases with regard to dividends.
While purchasing shares, aside of risks and dividends analysis, it is absolutely important to examine
company
carefully as for its profit/loss accounting, balance, cash flows, distribution of profits between its shareholders,
managers’ and executives’ wages etc. Only when you are sure of all the ins and outs of a company, you can
easily buy or sell shares. If you are not confident of the information, it is more advisable not to hold shares
for a long time (especially before financial accounting published).
Dr. Goldfinger
www.financegates.com
This article can be reprinted for free. To reprint this
article, please, include the following code:
FinanceGates: free financial advice. Educational articles, financial news
and reviews on investing, personal finance, stocks, funds.
instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within
establishing proposition and demand and decreasing of operational expenses, incurred by the participants
of
the market.
Financial market comprises variety of instruments, hence its functioning totally depends on instruments held.
Usually it
can be classified according to the type of financial instruments and according to the terms of instruments’
paying-off.
From the point of different types of instruments held the market can be divided into the one of promissory
notes and
the one of securities (stock market). The first one contains promissory instruments with the right for its
owners to get some fixed amount of money in future and is called the market of promissory notes, while the
latter binds the
issuer to pay a certain amount of money according to the return received after paying-off all the promissory
notes
and is called stock market. There are also types of securities referring to both categories as, e.g.,
preference shares and converted bonds. They are also called the instruments with fixed return.
Another classification is due to paying-off terms of instruments. These are: market of assets with high
liquidity
(money market) and market of capital. The first one refers to the market of short-term promissory notes with
assets
age up to 12 months. The second one refers to the market of long-term promissory notes with instruments
age surpasses 12 months. This classification can be referred to the bond market only as its instruments
have fixed expiry date, while the stock market’s not.
Now we are turning to the stock market.
As it was mentioned before, ordinary shares’ purchasers typically invest their funds into the company-issuer
and
become its owners. Their weight in the process of making decisions in the company depends on the
number of shares
he/she possesses. Due to the financial experience of the company, its part in the market and future potential
shares
can be divided into several groups.
1. Blue Chips
Shares of large companies with a long record of profit growth, annual return over $4 billion, large
capitalization
and constancy in paying-off dividends are referred to as blue chips.
2. Growth Stocks
Shares of such company grow faster; its managers typically pursue the policy of reinvestment of revenue
into further
development and modernization of the company. These companies rarely pay dividends and in case they
do the
dividends are minimal as compared with other companies.
3. Income Stocks
Income stocks are the stocks of companies with high and stable earnings that pay high dividends to the
shareholders.
The shares of such companies usually use mutual funds in the plans for middle-aged and elderly people.
4. Defensive Stocks
These are the stocks whose prices stay stable when the market declines, do well during recessions and are
able to minimize risks. They perform perfect when the market turns sour and are in requisition during
economic boom.
These categories are widely spread in mutual funds, thus for better understanding investment process it is
useful to keep in mind this division.
Shares can be issued both within the country and abroad. In case a company wants to issue its shares
abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks
and point at shareholders’ right to possess the shares of a foreign company under the asset management
of a bank. Each ADR signals of one or more shares possession.
When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends.
They
depend on: type of share, financial state of the company, shares category etc.
Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on its profitability
and spare
cash. Dividends differ from each other as they are to be paid in a different period of time, with the possibility
of
being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when
a company
is in a financial distress or in case executives decide to reinvest income into the development of the
business. While
calculating acceptable share price, dividends are the key factor.
Price of ordinary share is determined by three main factors: annual dividends rate, dividends growth rate
and discount
rate. The latter is also called a required income rate. The company with the high risks level is expected to
have high
required income rate. The higher cash flow the higher share prices and versus. This interdependence
determines assets value. Below we will touch upon the division of share prices estimating in three possible
cases with regard to dividends.
While purchasing shares, aside of risks and dividends analysis, it is absolutely important to examine
company
carefully as for its profit/loss accounting, balance, cash flows, distribution of profits between its shareholders,
managers’ and executives’ wages etc. Only when you are sure of all the ins and outs of a company, you can
easily buy or sell shares. If you are not confident of the information, it is more advisable not to hold shares
for a long time (especially before financial accounting published).
Dr. Goldfinger
www.financegates.com
This article can be reprinted for free. To reprint this
article, please, include the following code:
FinanceGates: free financial advice. Educational articles, financial news
and reviews on investing, personal finance, stocks, funds.
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