35. Stocks and shares
Individuals and groups of people doing business as a partnership, have unlimited liability for debt, unless they form a limited company. If the business does badly and cannot pay its debts, any creditor can have it declared bankrupt. The unsuccessful business people may have to sell nearly all their possessions in order to pay their debts. This is why most people doing business form limited companies. A limited company is a legal entity separate from its owners, and is only liable for the amount of capital that has been invested in it. If a limited company goes bankrupt, it is wound up and its assets are liquidated (i.e. sold) to pay the debts. If the assets don't cover the liabilities or the debts, they remain unpaid. The creditors simply do not get all their money back.
Most companies begin as private limited companies. Their owners
have to put up the capital themselves, or borrow from friends or a bank,
perhaps a bank specializing in venture capital. The founders have to write a Memorandum
of Association (GB) or a Certificate of Incorporation (US), which states the
company's name, its purpose, its registered office or premises, and the amount
of authorized share capital. They also write Articles of Association (GB) or
Bylaws (US), which set out the duties of directors and the rights of
shareholders (GB) or stockholders (
A successful, growing company can
apply to a stock exchange to become a public
limited company (GB) or a listed company (
The act of issuing shares (GB) or stocks (US) for the first time is known as floating a company (making a flotation). Companies generally use an investment bank to underwrite the issue i.e. to guarantee to purchase all the securities at an agreed price on a certain day, if they cannot be sold to the public. 757e46h
Companies wishing to raise more money for expansion can sometimes issue new shares, which are normally offered first to the existing shareholders at less than their market price. This is known as a rights issue. Companies sometimes also choose to capitalize part of their profit, i.e. turn it into capital, by issuing new shares to shareholders instead of paying dividends. This is known as a bonus issue.
Buying a share gives its holder part of the ownership of a company. Shares generally entitle their owner to vote at a company's Annual General Meeting (GB) or Annual Meeting of Stockholders (US), and to receive a proportion of distributed profits in the form of a dividend - or to receive part of the company's residual value if it goes into liquidation. Shareholders can sell their shares on the secondary market at any time, but the market price of a share - the price quoted at any given time on the stock exchange, which reflects (more or less) how well or badly the company is doing - may differ radically from its nominal value.
Vocabulary
Find words in the text which mean the following
1 having a responsibility or an obligation to do something, e.g. to pay a debt
2 a person or organization to whom money is owed (for goods or services rendered, or as repayment of a loan)
3 to be insolvent: unable to pay debts
4 everything of value owned by a business that can be used to produce goods, pay liabilities, and so on
5 to sell all the possessions of a bankrupt business
6 money that a company will have to pay to someone else (bills, taxes, debts, interest and mortgage payments, etc.)
7 to provide money for a company or other project
8 money invested in a possibly risky new business
9 the people who begin a new company
10 the place in which a company does business: an office, shop, workshop, factory, warehouse, and so on
11 to guarantee to buy an entire new share issue, if no one else wants it
12 a proportion of the annual profits of a limited company, paid to shareholders
Alternative terminology
Americans often talk about corporations rather than companies and about an initial public offering rather than a flotation.
Another name for stocks and shares is equities, because all the stocks or shares of a company - or at least all those of a particular category - have equal value.
Two terms for nominal value are face value and par value.
Other
names for a bonus issue are a scrip issue (short for 'subscription
certificate') and a capitalization issue,
and in the
Vocabulary
Match up the following words and definitions.
Blue chip Defensive stock Growth stock
Insider share-dealing Institutional investors Mutual fund
Market-maker Portfolio Stockbroker
a company that spreads investors' capital over a variety of securities
an investor's selection of securities
a person who can advise investors and buy and sell shares for them
a stock in a large company or corporation that is considered to be a secure investment -
a stock - in an industry not much affected by cyclical trends - that offers a good return but only a limited chance of rise or decline in price
a wholesaler in stocks and shares who deals with brokers
financial organizations such as pension funds and insurance companies which own most of the shares of all leading companies (over 60%, and rising)
the use of information not known to the public to make a profit out of buying or selling shares
36. Bonds
Companies finance most of their activities by way of internally generated cash flows. If they need more money they can either sell shares or borrow, usually by issuing bonds. More and more companies now issue their own bonds rather than borrow from banks, because this is often cheaper: the market may be a better judge of the firm's creditworthiness than a bank, i.e. it may lend money at a lower interest rate. This is evidently not a good thing for the banks, which now have to lend large amounts of money to borrowers that are much less secure than blue chip companies.
Bond-issuing companies are rated by private rating companies such as Moody's and Standard & Poors, and given an 'investment grade' according to their financial situation and performance, Aaa being the best, and C the worst, i.e. nearly bankrupt. Obviously, the higher the rating, the lower the interest rate at which a company can borrow.
Most bonds are bearer certificates, so after being issued (on the primary market), they can be traded on the secondary bond market until they mature. Bonds are therefore liquid, although of course their price on the secondary market fluctuates according to the changes in interest rates. Consequently, the majority of bonds on the secondary market are traded either above or below par. A bond's yield at any particular time is thus its coupon (the amount of interest it pays) expressed as a percentage of its price on the secondary market.
For companies, the advantage of debt financing over equity financing is that bond interest is tax deductible. In other words, a company deducts its interest payments from its profits before paying tax, whereas dividends are paid out of already-taxed profits. Apart from this 'tax shield', it is generally considered to be a sign of good health and anticipated higher future profits if a company borrows. On the other hand, increasing debt increases financial risk: bond interest has to be paid, even in a year without any profits from which to deduct it, and the principal has to be repaid when the debt matures, whereas companies are not obliged to pay dividends or repay share capital. Thus companies have a debt-equity ratio that is determined by balancing tax savings against the risk of being declared bankrupt by creditors.
Governments, of course, unlike
companies, do not have the option of issuing equities. Consequently they issue
bonds when public spending exceeds receipts from income tax, VAT, and so on. Long-term
government bonds are known as gilt-edged securities, or simply gilts, in
Rating company - firma de rating
Debt financing - finantarea debitului
Equity financing - finantarea actiunilor
Investment grade - gradul riscului de investitie
Debt-equity ratio - ratia debit-actiuni
Public spending - chletuieli publice
Receipts - încasari, venituri
Treasury bonds - certificate de trezorerie pe termen lung
Treasury bills - certificate de trezorerie pe termen scurt
Vocabulary
Match up the words or phrases on the left with the corresponding ones on the right.
1 investors A the amount of a loan
2 issuing bonds B borrowing money
3 principal C date at which the money will be returned
4 maturity D fall in interest rates
5 pension funds E keep their bonds till maturity
6 buy-and-hold investors F default
7 non-payment G profits on the sale assets
8 price appreciation H providers of funds
9 price depreciation I retirement money
10 capital gains J rise in interest rates
Vocabulary
Match up the expressions on the left with the definitions on the right.
1 equity financing A a security whose owner is not
registered with the issuer
2 debt financing B easily sold (turned into cash)
3 bearer certificate C the rate of interest paid by a fixed interest security
4 liquid D the rate of income an investor receives taking into account a security's current price
5 par E issuing bonds
6 coupon F issuing shares
7 yield G nominal or face value (100%)
37. Futures, options and swaps
Vocabulary
Match up the following words and definitions.
1 Futures
A contracts giving the right, but not the obligation, to buy or sell a security, a currency, or a commodity at a fixed price during a certain period of time
2 Options
B contracts to buy or sell fixed quantities of commodity, currency, or financial asset at a future date, at a price fixed at the time of making the contract
3 Commodities
C a general name for all financial instruments whose price depends on the movement of another price
4 Derivatives
D buying securities or other assets in the hope of making a capital gain by selling them at a higher price (or selling them in the hope of buying them back at a lower price)
5 Hedging
E making contracts to buy or sell a commodity or financial asset at a pre-arranged price in the future as a protection or 'insurance' against price changes
Speculation
F raw materials or primary products (metals, cereals, coffee, etc.) that are traded on special markets
Select ten or eleven of the following words that you would expect to find in an introductory text about futures and options.
Assets beer bush call commodities contracts
Copper currencies discount store foodstuffs hedge
Liabilities plastic phone raw materials shout
Spot market supermarket tea
Now read the text, and see if you find the words you selected.
Every weekday, enormous amounts of commodities, currencies and financial securities are traded for immediate delivery at their current price on spot markets. Yet there are also futures markets on which contracts can be made to buy and sell commodities, currencies, and various financial assets, at a future date (e.g. three, six or nine months adead), but with the price fixed at the time of the deal. Standardized deals for fixed quantities and time periods (e.g. 25 tons of copper to be delivered next June 30) are called futures; individual, non-standard, 'over-the'counter' deals between two parties (e.g. 1.7 billion yen to be exchanged for dollars on September 15, at a rate set today) are called forward contracts.
Futures, options and other derivatives exist in order that companies and individuals may attempt to diminish the effects of, or profit from, future changes in commodity and asset prices, exchange rates, interest rates, and so on. For example, the prices of foodstuffs, such as wheat, maize, coca, coffee, tea and orange juice are frequently affected by droughts, floods and other extreme weather conditions. Consequently many producers and buyers of raw matrials want to hedge, in order to guarantee next season's prices. When commodity prices are expected to rise, future prices are obviously higher than (at a premium on) spot prices; when they are expected to fall they are at a discount on spot prices.
In recent years, especially since financial deregulation, exchange rates and interest rates have also fluctuated widly. Many businesses, therefore, want to buy or sell currencies at a guaranteed future price. Speculators, anticipating currency appreciations or depreciations, or interest rate movements, are also active in currency futures markets, such as the London International Financial Futures Exchange (LIFFE, pronounced 'life').
Options
As well as currencies and commodities, there is now a huge futures market in stocks and shares. One can buy options giving the right - but not the obligation - to buy and sell securities at a fixed price in the future. A call option gives the right to buy securities (or a currency, or a commodity) at a certain price during a certain period of time. A put option gives the right to sell an asset at a certain price during a certain period of time. These options allow organizations to hedge their equity investments.
For example, if you think a share worth 100 will rise, you can buy a call option giving the right to buy at 100, hoping to sell this option, or to buy and resell the share at a profit. Alternatively, you can write a put option giving someone else the right to sell the shares at 100: if the market price remains above 100, no one will exercise the option, so you earn the premium.
On the contrary, if you expect the value of a share that you own to fall below its current price of 100, you can buy a put option at 100 (or higher): if the price falls, you can still sell your shares at this price. Alternatively, you could write a call option giving someone else the right to buy the share at 100: if the market price of the underlying security remains below the option's exercise price or strike price, no-one will take up the option, and you earn the premium.
Swaps
Options are merely one type of derivative instrument, based on another underlying price. Many companies nowadays also arrange currency swaps and interest rate swaps with other companies or financial institutions. For example, a French company that can borrow francs at a preferential rate, but which also needs yen, can arrange a swap with a Japanese company in the opposite position. Such currency swaps, designed to achieve interest rate savings, are of course open to the risk of exchange rate fluctuations. A company with a lot of fixed interest debt might choose to exchange some of it for another company's floating rate loans. Whether they save or lose money will depend on the movement of interest rates.
Call option - optiune de achizitie
Put option - optiune de vânzare
Swap - schimb
Summarizing
Complete the following sentences
1 The difference between futures and forward contracts is ..
2 Producers and buyers often choose to hedge because ..
3 Speculators can make money on currency futures if .
4 If you believe that a share price will rise, possible option strategies include .
5 On the contrary, if you think a share price will fall, possible option strategies include .
The risk with currency and interest rate swaps is that .
Vocabulary
Find words in the text that are in an obvious sense the opposite of the terms below.
Appreciate call discount drought floating
Hedging spot market strike price
|
