Sunday, July 8, 2012

Gordon Brent Pierce Investing in Capital Markets

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.

Rising 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.

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