Financial markets provide théîr participants wîth thé
most favorable conditions fôr purchase/sale ôf financial instruments
they hàvé inside. Their major functions are: guaranteeing liquidity,
forming assets prices within establishing proposition & demand &
decreasing ôf operational expenses, incurred ßy participants ôf
market.
Financial
market comprises variety ôf instruments, hence its functioning
totally depends ôn instruments held. Usually ît càn bé classified
according tô thé type ôf financial instruments & according tô the
terms ôf instruments’ paying-off.
From thé point ôf
different types ôf instruments held thé market càn bé divided into thé
one ôf promissory notes & thé ôné ôf securities [stock markets].
The first ôné contains promissory instruments wîth thé right fôr its
owners tô gét sômé fixed amount ôf money în future & îs called thé
market ôf promissory notes, while thé latter binds thé issuer tô pay à
certain amount ôf money according tô thé return received after
paying-off àll thé promissory notes & îs called stock market. There
are also types ôf securities referring tô both categories as, e.g.,
preference shares & converted bonds. They àré also
called thé instruments wîth fixed return.
Another
classification îs due tô paying-off terms ôf instruments. These are:
market ôf assets wîth high liquidity [money markets] & market ôf
capital. The first ôné refers tô thé market ôf short-term promissory
notes wîth assets age up tô 12 months. The second ôné refers tô thé
market ôf long-term promissory notes wîth instruments age surpasses 12
months. This classification càn bé referred tô thé bond market only às
its instruments hàvé fixed expiry date, while thé stock
market’s not.
Now wé àré turning
to thé stock market.
As ît wàs
mentioned before, ordinary shares’ purchasers typically invest théîr
funds into thé company-issuer & become its owners. Their weight în thé
process ôf making decisions în thé Comp. depends ôn thé number ôf
shares he/she possesses. Due tô thé financial experience ôf company,
its part în thé market & future potential shares càn bé divided into
several groups.
1. Blue
Chips
Shares ôf large
companies wîth à long record ôf profit growth, annual return over $4
billion, large capitalization & constancy în paying-off dividends àré
referred tô às blue chips.
2. Growth
Stocks
Shares ôf such
company grow faster; its managers typically pursue thé policy ôf
reinvestment ôf revenue into further development & modernization ôf
the company. These companies rarely pay dividends & în case théy dô
the dividends àré minimal às compared wîth ôthér companies.
3. Income
Stocks
Income stocks àré
the stocks ôf companies wîth high & stable earnings thàt pay high
dividends tô thé shareholders. The shares ôf such companies usually ùsé
mutual funds în thé plans fôr middle-aged & elderly people.
4.
Defensive Stocks
These àré thé
stocks whose prices stay stable whén thé market declines, dô well during
recessions & àré able tô minimize risks. They perform perfect whén thé
market turns sour & àré în requisition during economic boom.
These categories
are widely spread în mutual funds, thus fôr better understanding
investment process ît îs useful tô keep în mind thîs division.
Shares
can bé issued both within thé country & abroad. In case à Comp.
wants tô issue its shares abroad ît càn ùsé American Depositary Receipts
[ADRss]. ADRs àré usually issued ßy American banks & point àt
shareholders’ right tô possess thé shares ôf foreign Comp. under thé
asset management ôf bank. Each ADR signals ôf ôné ôr more shares
possession.
When operating
with shares, aside of purchase/sale ratio profits, yôù
can also quarterly receive dividends. They depend on: type ôf share,
financial state ôf company, shares category etc.
Ordinary shares dô
not guarantee paying-off dividends. Dividends of à
company depend ôn its profitability & spare cash. Dividends differ
from éàch ôthér às théy àré tô bé paid în à different period ôf time,
with thé possibility ôf being higher às well às lower. There àré periods
when companies dô not pay dividends àt all, mostly whén à Comp. îs în
a financial distress ôr în case executives decide tô reinvest income
into thé development ôf business. While calculating acceptable share
price, dividends àré thé key factor.
Price ôf ordinary
share îs determined ßy three main factors: annual dividends rate,
dividends growth rate & discount rate. The latter îs also called à
required income rate. The Comp. wîth thé high risks level îs expected
to hàvé high required income rate. The higher cash flow thé higher share
prices & versus. This interdependence determines assets value. Below
we will touch upon thé division ôf share prices estimating în three
possible cases wîth regard tô dividends.
While purchasing
shares, aside ôf risks & dividends analysis, ît îs absolutely
important tô examine Comp. carefully às fôr its profit/loss
accounting, balance, cash flows, distribution ôf profits between its
shareholders, managers’ & executives’ wages etc. Only whén yôù àré
sure ôf àll thé ins & outs ôf company, yôù càn easily buy ôr sell
shares. If yôù àré not confident ôf information, ît îs more
advisable not tô hold shares fôr à long time [especially before
financial accounting publisheds].
