Students' Centre
What is a Capital Market ?
The Capital market generally comprises financial institutions, the stock exchange, stockbrokers and dealers and traders. Its purpose is to facilitate the flow of savings from businesses, government and individuals who have funds, to those who need capital. The market allows owners of funds to purchase equity or securities.
What are Securities?
A Security is a legal certificate which proves that the person buying the security (the lender) has lent money to the person issuing the security (the borrower) or has purchased equity in a company. There are basically two types of securities,
Explain Kinds of Securities ?
- fixed income securities and variable dividend securities
Owners of debt securities lend money to the person who issued the security without owing any part of the company in which he invests. Such securities may be bonds, debentures and notes.
- debt and ownership securities.
Owners of securities, i.e. stocks, shares, or equities, become owners in part of the corporation in which they have invested and have certain rights.
Explain Equity
The equity of a company is the value of an enterprise when the debts it owes are deducted. It represents the ownership interest in a company held by its shareholders.
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What is Common stock?
Common shares are securities in a company which represents the shareholders part of the ownership in that company. They provide the shareholder with a vote in the management of the company and a claim on its profits. When profits are earned a dividend may be declared and distributed to shareholders. A dividend is an equal share of a company’s profits if a profit has been made. Since profits will vary as business thrives or as it declines, the size of dividend payments and their frequency may vary. Indeed in some years no dividends may be declared.
What are Preferred Shares?
Preferred shares offer the shareholder certain rights and privileges not enjoyed by common shares. Preferred shares generally entitle the shareholder to dividends at an agreed rate. Such dividend payments must be paid out of earnings before any dividends are paid on the common shares. Usually, preference shares tend to be cumulative, i.e where the company is unable to pay preferred dividends in a particular year, the unpaid dividends will accumulate and must be paid in the future before any dividends can be distributed to common shareholders.
In the event that the company decides to wind up its affairs, the preferred shares are usually entitled to a stipulated portion of the net assets of the company and take priority over common shares. On the other hand, the preferred shareholder does not usually have a voice in the management of the company.
Convertible preferred – are a special type of preferred share. Such shares can be converted at the option of the holder, and may be exchanged into the company’s common shares.
Participating preferred shares – are entitled to share with the common stock after payment of the initial dividend at a predetermined rate.
Redeemable preferred shares- can be called or redeemed after giving due notice to the shareholder. A preferred share which is not redeemable is termed “non-callable” or “non-redeemable”.
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Explain the earnings of shareholders ?
Common shareholders are entitled to vote at the company’s annual meetings. They may elect directors to represent their interests at annual general meetings of all the company’s shareholders. They may also receive dividends when they are earned, recommended and declared payable. Common shareholders sometimes benefit from bonus dividends which the company does not wish to pay out as part of the regular annual dividend.
Sometimes the dividend may be in the form of additional shares. This usually happens when the company is expanding or may also occur where there has been revaluation or recalculation of the assets of a company. In the place of a cash dividend, the company issues additional stock to each shareholder in acknowledgement of his claim to the profits retained in the business. This is referred to as stock dividend and is issued in proportion to the number of shares held by each stockholder. Very often this will result in an increase in the market value of the stock.
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Who participates in the capital market?
- Owners of capital – individual investors, businesses, commercial houses, government, insurance companies, commercial banks and charitable organizations.
- Seekers of capital – individuals buying houses, those acquiring mortgage loans, borrowers who wish to expand businesses, companies wishing to purchase equipment, Governments who wish to finance major capital project.
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What is a Stock Exchange or Securities Exchange?
A stock exchange or securities exchange is a marketplace where stocks offered for sale are listed and exchanged. Typically, the exchange is made up of a Board of Governors generally selected by the members, which is chosen to represent the interests of seat holders. The Board then employs an executive officer, to manage the Exchange. The Exchange usually assigns a number of seats to brokers. Persons eligible to be brokers may purchase seats in the Exchange. In the Caribbean, there are security exchanges in Barbados, Jamaica and Trinidad & Tobago.
Brokers are specialist investors who bring buyers and sellers together, by matching the price of securities buyers want to pay, with the prices sellers are asking. They then charge a fee for performing this transaction. In developed exchanges they work for investment houses. Their employees are known as traders and they trade on the floor of the Exchange. Traders may trade on behalf of their clients or for the account of their own investment house or own dealers.
A Bull Market. Is a market in which the buyers dominate
i.e. a rising market
A Bear Market Is a market in which the sellers dominate
i.e. a declining market.
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Explain the different types of business organizations?
Businesses may also be organized as sole proprietorship, a partnership or corporation.
- A single proprietor owns his own business. His personal assets are not held distinct from those of his business. Many very small businesses operate as sole proprietors. A sole proprietor is legally liable for the debts of the business and his personal assets can be disposed of by law to meet his creditors.
- A Partnership is made up of two people or more. Like a sole proprietor the personal assets of the partners can be claimed by creditors. However, it is a simple arrangement which many small businesses prefer because there is no need to comply with tax and other obligations of a company. However, the survival of partnerships tend to depend a great deal on the ability of the partners to work together.
- A corporation is a legal entity established to do business under the Companies Act of Barbados. A corporation is separate from the shareholders which comprise it, and has its own legal person. It is required to have its own name and a registered office. Not all businesses are organized as corporations. A corporation – is a more enduring arrangement than either a partnership or a sole proprietorship. It permits financial savings to be pooled together. It allows the management of a company to be different from its ownership. It is a separate legal entity and each shareholder is only liable for the sum of money which he paid for his shares. This is referred to as a limited liability. While shareholders may dispose of their shares in a company, the corporation still continues, as it has a legal permanence. This permits it to contract long term liabilities, and to invest in research and development, the benefits of which accrue far into the future. It permits it to plan for changes in its management and to strategise for the long term future of the company beyond the lives of its directors or its management.
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Explain Capitalizing the Corporation
- Companies obtain capital by the sale of shares. The initial capital of a corporation must be in the form of common shares but a company may issue other types of shares e.g. preferred shares after incorporation. Companies may also issue long term debt, e.g. debenture issues and other types of debt instruments.
- A company’s retained earnings also constitute part of its capital. Investors look to retained earnings of the company as an indication of its financial strength. Common shares are securities, which show the individual’s ownership in the corporation and his rights and privileges.
- Preferred shares give the owners the right to a set rate of dividends to be paid from the profits or earnings of the company, before the dividend is paid to common shareholders.
What are Government Securities?
Government Securities are investment instruments that are issued by the Government. There are various types of securities, the main ones being Savings Bonds, Treasury Notes and Debentures. They are issued by the Central Bank of Barbados, which acts as the agent for the Government.
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What are Savings Bonds?
A Savings Bond is a five-year security issued at a discount, which offers an individual an opportunity to set aside some savings for a period of five years on which they can presently earn interest. Issued at discount means that an individual, say John Brown, pays $93 dollars for a hundred dollar value savings bond. On maturity, after the five-year period, John Brown receives $100, which means that he has gained $7 dollars worth of interest/income. If he is desirous John Brown can take his 100 dollars and reinvest it and so doing he can earn further interest. Savings Bonds are issued in denominations/amounts ranging from $50 to $5,000. The maximum which an individual can hold in any one issue of Bonds is $50,000.
What happens if a person wishes to have his or her funds, perhaps because of an emergency, before the bond has matured(five years)?
They can do so simply by exchanging their bond certificates for cash. They would receive the amount paid in, plus any interest that has accumulated to date, bearing in mind that interest is added at six-month intervals. So that in the case of John Brown, after a year he could cash in his Savings Bond certificate for $93 plus any interest earned to date. The value of the Bond at various time intervals is noted at the back of the Bond certificate for the benefit of those wishing to cash in their bonds before maturity.
How can one acquire Savings Bonds?
- Simply visit your commercial bank and ask for an application form for Savings Bonds.
- Complete this application form, ask for help from your commercial bank if necessary, and make the relevant payment to the Bank in exchange for a Bond Certificate.
- Similarly, upon maturity of the bond you can return your certificate to your commercial bank for cash or to purchase more securities.
Note: Savings Bonds are issued at various, though not fixed, times of the year.
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What are Treasury Notes?
Treasury Notes are fixed Income securities. These are securities on which you receive a fixed rate of interest, until the security matures. Your purchase of securities must be from $1000 and up, in multiples of $1000. Treasury Notes can be issued for a period ranging from a year to ten years with no limit on the maximum amount that an individual can purchase (except that his or her purchase cannot exceeds the total amount of Treasury Notes on offer). Government may, for example, offer a three-year Treasury Note at 7.5% interest per year or a seven-year Treasury Note at 8% per annum. In the case of our potential investor John Brown, who wishes to invest $1000, he would pay $1000 for a $1000 Treasury Note with a guarantee that he would be paid 7.5% interest per year (for the three-year Note)in two installments each year(every six months) of the life of the Note.
How can one acquire a Treasury Note?
- Application forms are available from the Central Bank of Barbados, the Accountant General’s Office and the commercial banks.
- Complete this application form, and return it to the Central Bank of Barbados or your commercial bank, as they can also perform the service of purchasing Treasury Notes.
- Make the relevant payment to the Central Bank of Barbados or your commercial bank in exchange for a Treasury Note Certificate.
- Similarly, upon maturity you can return your certificate to the Central Bank to be cashed or to purchase more securities.
What are Debentures?
Debentures are fixed Income securities with all the same features as Treasury Notes but with a longer investment life of 11 years or more. The acquisition of a Debenture is the same as for a Treasury Note.
Note: Treasury Notes and Debentures are tradable, that is, they can be sold on the Securities Exchange to any interested individual, Commercial Bank or institution.
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