Introduction Flashcards
What are the Major Financial Assets?
- Stocks
- Bonds
- Financial derivatives
- Currencies
- Commodities
- Real Estate
Stock- definition
- stock = piece of ownership in a compagny
- This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own.
- Units of stock are called “shares.”
- If the stocks are selling = turn into equity
What are the two types of stock?
Common stock
Preferred stock
What is a common stock
- common stock/ standardize stock
- the great majority of stock is issued is in this form (where more people invest).
- Common shares represent a claim on profits (dividends) and confer voting rights
- Stockholders thus have the ability to exercise control over corporate policy and management issues compared to preferred shareholders.
What is a preferred stocks?
- Preferred stock comes with no voting rights.
Preferred shareholders have no voice in the future of the company. - In fact, preferred stock functions similarly to bonds since with preferred shares, investors are usually guaranteed a fixed dividend in perpetuity.
- In liquidation, preferred stockholders have a greater claim to a company’s assets and earnings
- The dividends for this type of stock are usually higher than those issued for common stock.
- If a company misses a dividend payment, it must first pay any arrears to preferred shareholders before paying out common shareholders.
-Preferred also have a capability feature which gives the issuer the right to redeem the shares from the market after a predetermined time
What is a bond? (I owe you)
- A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
- Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations
- Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.
What are the 3 different types of bond?
Based on maturity:
- Long term debt = bonds (10 year)
- Medium debt= Notes (1 year-10 years)
- Short term debt= Bills (up to one year)
Financial derivatives/ Financial asset?
A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.
Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets.
Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form.
Rather, their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry
What are the different assets?
Real assets
Financial asset
What is a Real asset?
Real assets are physical assets that have an intrinsic worth due to their substance and properties.
Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.
They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets, such as stocks and bonds.
What means Capital Budgeting/ Captial Expenditure (CAPEX)
Decision to invest in tangible (expanding stores) or intangible assets (Research development for new drugs)
Capital budgeting is the process a business undertakes to evaluate potential major projects or investments
. Construction of a new plant or a big investment in an outside venture are examples of projects that would require capital budgeting before they are approved or rejected.
As part of capital budgeting, a company might assess a prospective project’s lifetime cash inflows and outflows to determine whether the potential returns that would be generated meet a sufficient target benchmark.
What is the difference between Investment decision and financing decision
Investment decision: Purchase of real assets
Financing decision: Sale of financial assets.
What means capital structure?
- Based on the question: How to finance a firm’s overall operations and growth?
- Choice between debt and equity financing.
- Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings. - Short-term debt is also considered to be part of the capital structure.
What is Equity?
Equity, typically represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off.
Equity can be found on a company’s balance sheet and is one of the most common pieces to assess the financial health of a company.
What is a corporation?
- Legal entity, owned by shareholders
- Can make contracts, carry on business, borrow, lend, sue, and be sued
- Shareholders have limited liability and cannot be held personally responsible for corporation’s debts
