Businessmen normally create a limited company because it has a limited liability for debts. This fact shows that one of the worries that a company involves is the ways to finance it. They need to generate cash-flows to increase their capital, or simply to pay their debts.
One way of financing is selling shares. Most companies try to apply to stock exchanges for issuing shares (equity financing). But this shares also can be capitalized when the company pay the shareholders in shares instead of paying dividends.
Another way to finance a company is borrowing, usually issuing bonds (debt financing) but at a determined interest rate. The advantages of issuing bonds is that borrowing is a sign of wealth and the interest rate is lower than borrowing from banks. Comparing bonds to shares the bond interest is tax deductible. On the other hand, if a company increase its debt, it also increase its financial risk.Nevertheless, companies can also trade with securities in the secondary market.
Companies also use options to hedge the equity investment. The option gives the right to buy (call option) or sell (put option) securities at a fixed price in the future. That means that a company can negociate with an option, expecting a variation of the secuty’s value, to finally earn the premium.
Speculating, in futures and forward markets, is a practice which exist in order to anticipate the appeciation or depreciations of exchange or interest rates so they can make a profit. The problem is that the expectation may be wrong.
To conclude we can say that securities are very important to finance a company, but it is more important to know how to trade with them. Everything has a risk.(289)
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