Gordon Brent Pierce Investing in Capital Markets A capital market is
any mechanism that allows a corporation, government, or other enterprise to
obtain from investors a large sum of money for an extended period of time.
Corporations use stock to raise revenue, while governments sell bonds to obtain
funds. Managing a capital market comes from two perspectives: The borrower, and
the investor. Corporate stock is the opposite of loaning money to a bank. Money
is instead given to an enterprise, with the expectation of receiving a portion
of the profits four times a year (the infamous financial quarter). Unlike a
loan, a corporation is only required to return dividends or buy up bonds with
its remaining money upon liquidation. It is not legally required to pay every
quarter--it could instead invest its profits into new equipment or other assets.
The stock holders are then denied payment for a quarter or several, but the
stock retains value because it may be more competitive in the future. A loan is federally insured. A stock has no security beyond
the present strength of the company. If the company fails for whatever reason,
then its stock becomes worthless. A corporation is not required to pay back what
is does not have. Bonds are the primary means by which governments and some
businesses raise money. A bond is given a face value, but only a fraction is
paid up front. A bond represents a legal promissory note whereby the bondholder
is paid back with interest at a future date. Bonds are generally considered
secure assets because anyone who returns it at maturity is guaranteed at least
the face value, and perhaps some beyond that if kept beyond the maturity date.
For someone who cashes a bond before its maturity date, there is risk.
interest rates leads to the premature bond being devalued, while a lower
interest rate allows the bond to be cashed at a higher value. Another risk is
the financial solvency of nations and financial institutions. If a corporation
fails, then it cannot pay its bond holders, although it is forced to pay bonds
before it pays stock, because bonds are legal debt. Gordon Brent Pierce A nation can default because
of a financial crisis, and many nations find it difficult to increase taxes
beyond a certain point. If a country is in financial trouble, it may withhold
redeeming bonds for a few years, which will cause the value of the bonds to
plummet, and selling to speculators will become rampant.