Английский язык. Практический курс для решения бизнес-задач

Repackaging: Recently, securities have been issued to repackage existing assets. In a traditional securitization, a financial institution may wish to remove assets from its balance sheet in order to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way which makes them more attractive to investors.

For the holder:

Investors in securities may be retail, i.e. members of the public. The greatest part in terms of volume of investment is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds.

The traditional function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer.

The last decade has seen an enormous growth in the use of securities as collateral. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers.

Debt and Equity

Securities are traditionally divided into debt securities (lesson 30) and equities.

Equity:

An equity is an ordinary share in a company. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. Stock is the capital raised by a corporation, through the issuance and sale of shares. A shareholder is any person or organization which owns one or more shares of a corporation’s stock.

In British English, the word stock has another meaning in finance, referring to a bond. It can also be used more widely to refer to all kinds of marketable securities. Where a share of ownership is meant the word share is usually used in British English.

Ownership

The owners of a company may want additional capital to invest in new projects. They may also simply wish to reduce their holding, freeing up capital for their own private use. By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends.

In the common case, where there are thousands of shareholders, it is impractical to have all of them making the daily decisions required in the running of a company. Thus, the shareholders will use their shares as votes in the election of BoD members.

Each share constitutes one vote (except in a cooperative society where every member gets one vote regardless of the number of shares they hold). Effective control rests with the majority shareholder (or shareholders acting in concert).

Shareholder Rights

Although owning 51% of shares means that you own 51% of the company, it does not give you the right to use a company’s building, equipment, or other property. This is because the company is considered a legal person and owns all its assets itself.

Owning shares does not mean responsibility for liabilities. If a company goes broke and has to default on loans, the shareholders are not liable in any way. However, all money obtained by converting assets into cash will be used to repay loans and other debts first, so that shareholders cannot receive any money unless and until creditors have been paid (most often the shareholders end up with nothing).

Buying

There are various methods of buying and financing stocks. The most common means is through a stock broker. There are many different stock brokers to choose from such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type would be a bank or credit union that may have a deal set up with a broker.

There are other ways of buying stock. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor’s relations departments. Another way to buy stock is through Direct Public Offerings which are sold by the company itself.

Selling

Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high (short selling), if not in that order although a number of reasons may induce an investor to sell at a loss. As with buying a stock, there is a transaction fee for the broker’s efforts in arranging the transfer of stock from a seller to a buyer. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds.

Types of Shares

There are several types of shares, including common stock, preferred stock, treasury stock, and dual class shares. Preferred stock have priority over common stock in the distribution of dividends and assets, and sometime have enhanced voting rights such as the ability to veto M&As or the right of first refusal when new shares are issued. A dual class equity structure has several classes of shares (for example Class A, Class B, and Class C) each with its own advantages and disadvantages. Treasury stock are shares that have been bought back from the public.

Hybrid securities combine characteristics of both debt and equity securities:

– preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of capital in priority to ordinary shareholders.

– convertibles are bonds which can be converted, at the election of the bondholder, into another sort of security such as equities.

– equity warrants are contractual entitlements to purchase shares on pre-determined terms. They are often issued together with bonds or existing equities, but are detachable from them and separately tradeable.

Securities Markets

The securities markets can be divided into the primary markets and the secondary markets. Primary markets comprise new securities sold to their first holders. The issue of new securities is commonly known as an IPO (see lesson 31).