Financial markets provide their participants with the most favorable conditions for purchase/sale of financial instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within establishing proposition and demand and decreasing of operational expenses, incurred by the participants of the market.
Financial market comprises variety of instruments, hence its functioning totally depends on instruments held. Usually it can be classified based on the sort of financial instruments and according to the conditions of tools’ paying-off.
From the point of different kinds of instruments held that the market can be divided into one of promissory notes and the one of securities (stock market). The first one comprises promissory instruments with the right for its owners to get some predetermined quantity of money in future and is called the market of promissory notes, while the latter binds the issuer to pay a certain amount of money based on the return received after paying-off all of the promissory notes and is called stock market. Additionally, there are kinds of securities referring to both categories as, e.g., preference shares and converted bonds. They’re also known as the instruments with fixed return.
Another classification is because of paying-off provisions of instruments. These are: market of assets with high liquidity (money market) and market of funds. The first one describes the marketplace of short term promissory notes with resources age up to 12 months. The second one describes the marketplace of long-term promissory notes with tools age surpasses 12 months. This classification can be referred to the bond market just because its instruments have fixed expiry date, while the stock market isn’t.
Now we’re turning to the stock exchange.
As it was mentioned earlier, ordinary shares’ purchasers typically invest their funds to the company-issuer and become its owners. Their weight in the process of making decisions in the company is dependent upon the amount of shares he/she owns. Because of the financial experience of the business, its role in the market and future potential stocks can be divided into many classes.
1. Blue Chips
Shares of large companies with a long record of profit growth, annual return over $4 billion, large capitalization and constancy in paying-off dividends are known as blue chips.
2. Growth Stocks
Shares of such company grow faster; its managers typically pursue the policy of reinvestment of revenue into further development and modernization of the business. These companies rarely pay dividends and in the event they do the dividends are minimal compared to other businesses.
3. Income Stocks
Income stocks are the stocks of companies with high and stable earnings that pay large dividends to the shareholders.
The shares of these companies usually use mutual funds in the programs for middle-aged and older folks.
4. Defensive Stocks
These are the stocks whose prices stay stable when the market declines, do well during recessions and have the ability to minimize risks. They perform perfect once the market turns sour and are in requisition during economic boom.
These classes are widely dispersed in mutual funds, thus for better understanding investment process it’s useful to bear in mind that division.
Shares can be issued both inside the country and overseas. If a company wants to issue its shares abroad it may use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks and purpose at investors’ right to get the shares of a foreign company under the asset management of a bank. Each ADR signs of one or more stocks ownership.
When operating with shares, aside from purchase/sale ratio profits, you can also quarterly receive dividends. They depend on: type of share, financial state of the company, shares category etc..
Ordinary shares don’t guarantee paying-off dividends.
Dividends of a company depend on its profitability and save cash. Dividends differ from each other as they should be paid in another time period, with the chance of being higher and lower. There are periods when companies don’t pay dividends in any way, mostly when a company is in a financial distress or if executives opt to reinvest income into the development of the enterprise. While calculating acceptable share price, dividends are the key element.
Cost of ordinary share is determined by three major factors: annual dividends rate, dividends growth rate and discount rate. The latter is also referred to as a compulsory income rate. The firm with the high risks level is predicted to have elevated required income rate. The higher cash flow the higher share prices and versus. This interdependence determines assets worth. Below we’ll touch upon the branch of share costs estimating in three possible cases regarding dividends.
Whilst buying shares, aside from risks and dividends analysis, it’s absolutely crucial that you examine company carefully because of its profit/loss bookkeeping, balance, cash flows, distribution of profits between its shareholders, managers’ and executives’ wages etc.. Only when you’re certain of all of the ins and outs of a business, you can easily buy or sell stocks. If you’re not confident of this information, it is more advisable not to hold shares for a long time (especially before financial accounting published).