Sources of Finance

Abstract

The types and sources of securities that are offered by companies to raise capital are discussed in this chapter. The two major types of securities are debt and equity. Equity securities offer part ownership in the company. Returns are in the form of capital gains and dividends. The risks of equity ownership are the possibility of the loss of investment in the case of bankruptcy or liquidation. Debt securities offer returns in the form of more predictable interest payments and the repayment of the loan principal. Companies also offer preference shares, which are a mixture between the equity and debt since they provide part ownership but interest-like returns. There are number of different forms of debt that are offered by borrowers. The differences are concerned with the repayment schedule, the collateral offered for the loan and the maturity of the loan. The markets for financial securities are the capital markets for equity and long-term debt securities, the money market for short-term debt, and the foreign currency market and commodities market. Equities, that is, shares or stock of a company, are traded on the stock exchanges, whereas most bonds are traded in the over-the-counter or dealer markets. There are three main forms of derivatives: futures; options; and swaps. The use of these instruments to transform risk is discussed.