Companies need money to spend but their money comes from more places than just profit. There are a number of methods to raise money to finance activities including the following instruments:
a) Debt Securities (contracts to repay with securities)
– Bonds: secured with assets
– Debentures: unsecured
– Notes: typically short term
b) Equity Securities
– Preferred Shares: Paid first in dividends yet not owned; Hybrid.
– Common Shares: Ownership position in company; Residual Owners.
Investors purchase these securities for:
a) Interest Income
c) Capital gains
– Interest rate changes
– Growth of the company (div., splits, etc.)
Investors’ risks will include:
– Marketability (varies): nobody to buy at price
– Default (credit): risk-> on contractual obligation (no interest)
Also remember, governments also rely on debt securities for financing.