A security is a tradable financial asset. The term refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some jurisdictions the term excludes financial instruments other than equities and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g. equity warrants. In some countries and languages the term "security" is used in day-to-day parlance to mean any form of financial instrument though the underlying legal and regulatory regime may not have such a broad definition. In the United Kingdom, the national competent authority for financial markets regulation is the Financial Conduct Authority. In the United States, a security is a tradable financial asset of any kind. Securities are broadly categorized into: debt securities equity securities derivatives; the company or other entity issuing the security is called the issuer. A country's regulatory structure determines. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions.
Securities may be represented by a certificate or, more "non-certificated", in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary, they include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, various other formal investment instruments that are negotiable and fungible. Securities may be classified according to many categories or classification systems: Currency of denomination Ownership rights Terms to maturity Degree of liquidity Income payments Tax treatment Credit rating Industrial sector or "industry". Region or country Market capitalization State Securities are the traditional way that commercial enterprises raise new capital; these may be an attractive alternative to bank loans depending on their pricing and market demand for particular characteristics.
Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, a government may issue securities too. Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part of investment, in terms of volume, is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds; the traditional economic function of the purchase of securities is investment, with the view to receiving income or achieving capital gain. Debt securities offer a higher rate of interest than bank deposits, equities may offer the prospect of capital growth. Equity investment may offer control of the business of the issuer.
Debt holdings may offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment; the last decade has seen an enormous growth in the use of securities as collateral. Purchasing securities with borrowed money secured by other securities or cash itself is called "buying on margin". Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A, either at inception or only in default. For institutional loans, property rights are not transferred but enable A to satisfy its claims in the event that B fails to make good on its obligations to A or otherwise becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commercial banks, investment banks, government agencies and other institutional investors such as mutual funds are significant collateral takers as well as providers.
In addition, private parties may utilize stocks or other securities as collateral for portfolio loans in securities lending scenarios. On the consumer level, loans against securities have grown into three distinct groups over the last decade: 1) Standard Institutional Loans offering low loan-to-value with
In finance, a high-yield bond is a bond, rated below investment grade. These bonds have a higher risk of default or other adverse credit events, but pay higher yields than better quality bonds in order to make them attractive to investors; the holder of any debt is subject to interest rate risk and credit risk, inflationary risk, currency risk, duration risk, convexity risk, repayment of principal risk, streaming income risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk, political risk, taxation adjustment risk. Interest rate risk refers to the risk of the market value of a bond changing due to changes in the structure or level of interest rates or credit spreads or risk premiums; the credit risk of a high-yield bond refers to the probability and probable loss upon a credit event, or a credit quality change is issued by a rating agency including Fitch, Moody's, or Standard & Poors. A credit rating agency attempts to describe the risk with a credit rating such as AAA.
In North America, the five major agencies are Standard & Poor's, Moody's, Fitch Ratings, Dominion Bond Rating Service and A. M. Best. Bonds in other countries may be rated by local credit rating agencies. Rating scales vary. Government bonds and bonds issued by government-sponsored enterprises are considered to be in a zero-risk category above AAA. Bonds rated higher are called investment grade bonds. Bonds rated lower than investment grade on their date of issue are called speculative grade bonds, or colloquially as "junk" bonds; the lower-rated debt offers a higher yield, making speculative bonds attractive investment vehicles for certain types of portfolios and strategies. Many pension funds and other investors, are prohibited in their by-laws from investing in bonds which have ratings below a particular level; as a result, the lower-rated securities have a different investor base than investment-grade bonds. The value of speculative bonds is affected to a higher degree than investment grade bonds by the possibility of default.
For example, in a recession interest rates may drop, the drop in interest rates tends to increase the value of investment grade bonds. The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly; these bonds are called "fallen angels". The investment banker Michael Milken realized that fallen angels had been valued less than what they were worth, his time with speculative grade bonds started with his investment in these. Only did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organizing the issue of bonds that were speculative grade from the start. Speculative grade bonds thus became ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. In a leveraged buyout, an acquirer would issue speculative grade bonds to help pay for an acquisition and use the target's cash flow to help pay the debt over time.
In 2005, over 80% of the principal amount of high-yield debt issued by U. S. companies went toward corporate purposes rather than buyouts. In emerging markets, such as China and Vietnam, bonds have become important as term financing options, since access to traditional bank credits has always been proved to be limited if borrowers are non-state corporates; the corporate bond market has been developing in line with the general trend of capital market, equity market in particular. High-yield bonds can be repackaged into collateralized debt obligations, thereby raising the credit rating of the senior tranches above the rating of the original debt; the senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt. When such CDOs are backed by assets of dubious value, such as subprime mortgage loans, lose market liquidity, the bonds and their derivatives become what is referred to as "toxic debt".
Holding such "toxic" assets led to the demise of several investment banks such as Lehman Brothers and other financial institutions during the subprime mortgage crisis of 2007–09 and led the US Treasury to seek congressional appropriations to buy those assets in September 2008 to prevent a systemic crisis of the banks. Such assets represent a serious problem for purchasers because of their complexity. Having been repackaged several times, it is difficult and time-consuming for auditors and accountants to determine their true value; as the recession of 2008–09 hit, their value decreased further as more debtors defaulted, so they represented a depreciating asset. Those assets that might have gone up in value in the long-term depreciated quickly becoming "toxic" for the banks that held them. Toxic assets, by increasing the variance of banks' assets, can turn otherwise healthy institutions into zombies. Insolvent banks made too few good loans creating a debt overhang problem. Alternatively insolvent banks with toxic assets sought out risky speculative loans
Finance is a field, concerned with the allocation of assets and liabilities over space and time under conditions of risk or uncertainty. Finance can be defined as the art of money management. Participants in the market aim to price assets based on their risk level, fundamental value, their expected rate of return. Finance can be split into three sub-categories: public finance, corporate finance and personal finance. Matters in personal finance revolve around: Protection against unforeseen personal events, as well as events in the wider economies Transference of family wealth across generations Effects of tax policies management of personal finances Effects of credit on individual financial standing Development of a savings plan or financing for large purchases Planning a secure financial future in an environment of economic instability Pursuing a checking and/or a savings account Personal finance may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance and saving for retirement.
Personal finance may involve paying for a loan, or debt obligations. The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are: Financial position: is concerned with understanding the personal resources available by examining net worth and household cash flows. Net worth is a person's balance sheet, calculated by adding up all assets under that person's control, minus all liabilities of the household, at one point in time. Household cash flows total up all from the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished. Adequate protection: the analysis of how to protect a household from unforeseen risks; these risks can be divided into the following: liability, death, disability and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract.
Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning. Tax planning: the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax; as one's income grows, a higher marginal rate of tax must be paid. Understanding how to take advantage of the myriad tax breaks when planning one's personal finances can make a significant impact in which can save you money in the long term. Investment and accumulation goals: planning how to accumulate enough money – for large purchases and life events – is what most people consider to be financial planning.
Major reasons to accumulate assets include purchasing a house or car, starting a business, paying for education expenses, saving for retirement. Achieving these goals requires projecting what they will cost, when you need to withdraw funds that will be necessary to be able to achieve these goals. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savings to be invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which will subject the portfolio to a number of risks. Managing these portfolio risks is most accomplished using asset allocation, which seeks to diversify investment risk and opportunity; this asset allocation will prescribe a percentage allocation to be invested in stocks, bonds and alternative investments.
The allocation should take into consideration the personal risk profile of every investor, since risk attitudes vary from person to person. Retirement planning is the process of understanding how much it costs to live at retirement, coming up with a plan to distribute assets to meet any income shortfall. Methods for retirement plans include taking advantage of government allowed structures to manage tax liability including: individual structures, or employer sponsored retirement plans and life insurance products. Estate planning involves planning for the disposition of one's assets after death. There is a tax due to the state or federal government at one's death. Avoiding these taxes means that more of one's assets will be distributed to one's heirs. One can leave one's assets to friends or charitable groups. Corporate finance deals with the sources of funding and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, the tools and analysis used to allocate financial resources.
Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. Corporate f
In finance, a short sale is the sale of an asset that the seller has borrowed in order to profit from a subsequent fall in the price of the asset. After borrowing the asset, the short seller sells it to a buyer at the market price at that time. Subsequently, the resulting short position is "covered" when the seller repurchases the same asset in a market transaction and delivers the purchased asset back to the lender to replace the asset, borrowed. In the event of an interim price decline, the short seller will profit, since the cost of purchase will be less than the proceeds received upon the initial sale. Conversely, the short position will result in a loss if the price of a shorted asset rises prior to repurchase. "Shorting" can refer more to the use of derivatives or other techniques to achieve the same effect, such that the investor profits from the fall in the value of an asset without undertaking the borrowing of securities. Potential loss on a short sale is theoretically unlimited, as there is no theoretical limit to a rise in the price of the instrument.
However, in practice, the short seller is required to post margin or collateral to cover losses, inability to do so in a timely way would cause its broker or counterparty to liquidate the position. In the securities markets, the seller must borrow the securities to effect delivery in the short sale. In some cases, the short seller must pay a fee to borrow the securities and must additionally reimburse the lender for cash returns the lender would have received had the securities not been loaned out. Short selling is most done with instruments traded in public securities, futures or currency markets, due to the liquidity and real-time price dissemination characteristic of such markets and because the instruments defined within each class are fungible. In practical terms, "going short" can be considered the opposite of the conventional practice of "going long", whereby an investor profits from an increase in the price of the asset. Mathematically, the return from a short position is equivalent to that of owning a negative amount of the instrument.
A short sale may have a variety of objectives. Speculators may sell short hoping to realize a profit on an instrument that appears overvalued, just as long investors or speculators hope to profit from a rise in the price of an instrument that appears undervalued. Traders or fund managers may hedge a long position or a portfolio through one or more short positions. In contrast to a traditional merchant who sets out to "buy low, sell high", a short-seller sets out to "sell high, buy low", or to "buy high, sell low" when this buy is in fact "on tick". Research indicates that banning short selling has negative effects on markets. Short selling is subject to criticism and periodically faces hostility from society and policymakers; the following example describes the short sale of a security. To profit from a decrease in the price of a security, a short seller can borrow the security and sell it expecting that it will be cheaper to repurchase in the future; when the seller decides that the time is right, the seller buys equivalent securities and returns them to the lender.
The process relies on the fact. A short seller borrows through a broker, holding the securities for another investor who owns the securities; the lender does not lose the right to sell the securities while they have been lent, as the broker holds a large pool of such securities for a number of investors which, as such securities are fungible, can instead be transferred to any buyer. In most market conditions there is a ready supply of securities to be borrowed, held by pension funds, mutual funds and other investors; the act of buying back the securities that were sold short is called "covering the short" or "covering the position". A short position can be covered at any time. Once the position is covered, the short seller is not affected by subsequent rises or falls in the price of the securities, as he holds the securities required to repay the lender. Short selling refers broadly to any transaction used by an investor to profit from the decline in price of a borrowed asset or financial instrument.
However some short positions, for example those undertaken by means of derivatives contracts, are not technically short sales because no underlying asset is delivered upon the initiation of the position. Derivatives contracts include futures and swaps. Shares in ACME Inc. trade at $10 per share. A short seller investor borrows from a lender 100 shares of ACME Inc. and sells them for a total of $1,000. Subsequently, the price of the shares falls to $8 per share. Short seller now buys 100 shares of ACME Inc. for $800. Short seller returns the shares to the lender, who must accept the return of the same number of shares as was lent despite the fact that the market value of the shares has decreased. Short seller profits from the $200 difference between the price at which the short seller sold th
A government bond or sovereign bond is a bond issued by a national government with a promise to pay periodic interest payments and to repay the face value on the maturity date. Government bonds are denominated in the country's own currency, in which case the government cannot be forced to default, although it may choose to do so. If a government is close to default on its debt the media refer to this as a sovereign debt crisis; the terms on which a government can sell bonds depend on how creditworthy the market considers it to be. International credit rating agencies will provide ratings for the bonds, but market participants will make up their own minds about this; the first general government bonds were issued in the Netherlands in 1517. Because the Netherlands did not exist at that time, the bonds issued by the city of Amsterdam are considered their predecessor which merged into Netherlands government bonds; the average interest rate at that time fluctuated around 20%. The first bond issued by a national government was issued by the Bank of England in 1694 to raise money to fund a war against France.
It was in the form of a tontine. The Bank of England and government bonds were introduced in England by William III of England, who financed England's war efforts by copying the approach of issuing bonds and raising government debt from the Seven Dutch Provinces, where he ruled as a Stadtholder. Governments in Europe started issuing perpetual bonds to fund wars and other government spending; the use of perpetual bonds ceased in the 20th century, governments issue bonds of limited term to maturity. A government bond in a country's own currency is speaking a risk-free bond, because the government can if necessary create additional currency in order to redeem the bond at maturity. There have however been instances where a government has chosen to default on its domestic currency debt rather than create additional currency, such as Russia in 1998. Currency risk is the risk that the value of the currency a bond pays out will decline compared to the holder's reference currency. For example, a German investor would consider United States bonds to have more currency risk than German bonds.
A bond paying in a currency that does not have a history of keeping its value may not be a good deal if a high interest rate is offered. Inflation risk is the risk. Investors expect some amount of inflation, so the risk is that the inflation rate will be higher than expected. Many governments issue inflation-indexed bonds, which protect investors against inflation risk by linking both interest payments and maturity payments to a consumer prices index. If a central bank purchases a government security, such as a bond or treasury bill, it increases the money supply, in effect creating money. In the UK, government bonds are called gilts. Older issues have names such as "Treasury Stock" and newer issues are called "Treasury Gilt". Inflation-indexed gilts are called Index-linked gilts. UK gilts have maturities stretching much further into the future than other European government bonds, which has influenced the development of pension and life insurance markets in the respective countries. Consol Foreign exchange reserves of the People's Republic of China Government debt List of government bonds Municipal bond Treasury War Bonds
Speculation is the purchase of an asset with the hope that it will become more valuable in the near future. In finance, speculation is the practice of engaging in risky financial transactions in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument—rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends, or interest. Many speculators pay little attention to the fundamental value of a security and instead focus purely on price movements. Speculation can in principle involve any tradable financial instrument. Speculators are common in the markets for stocks, commodity futures, fine art, real estate, derivatives. Speculators play one of four primary roles in financial markets, along with hedgers, who engage in transactions to offset some other pre-existing risk, arbitrageurs who seek to profit from situations where fungible instruments trade at different prices in different market segments, investors who seek profit through long-term ownership of an instrument's underlying attributes.
With the appearance of the stock ticker machine in 1867, which removed the need for traders to be physically present on the floor of a stock exchange, stock speculation underwent a dramatic expansion through the end of the 1920s. The number of shareholders increased from 4.4 million in 1900 to 26 million in 1932. The view of what distinguishes investment from speculation and speculation from excessive speculation varies among pundits and academics; some sources note that speculation is a higher risk form of investment. Others define speculation more narrowly; the U. S. Commodity Futures Trading Commission defines a speculator as "a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements." The agency emphasizes that speculators serve important market functions, but defines excessive speculation as harmful to the proper functioning of futures markets. According to Benjamin Graham in The Intelligent Investor, the prototypical defensive investor is "...one interested chiefly in safety plus freedom from bother."
He admits, that "...some speculation is necessary and unavoidable, for in many common-stock situations, there are substantial possibilities of both profit and loss, the risks therein must be assumed by someone." Thus, many long-term investors those who buy and hold for decades, may be classified as speculators, excepting only the rare few who are motivated by income or safety of principal and not selling at a profit. Speculation is condemned on ethical-moral grounds as creating money from money and thereby promoting the vices of avarice and gambling. There is opinion that it serves no purposes from a human and economic perspective Nicholas Kaldor has long recognized the price-stabilizing role of speculators, who tend to out "price-fluctuations due to changes in the conditions of demand or supply," by possessing "better than average foresight." This view was echoed by the speculator Victor Niederhoffer, in "The Speculator as Hero", who describes the benefits of speculation: Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators.
When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell; this reduces prices, helping to reduce the surplus. Another service provided by speculators to a market is that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier or possible for others to offset risk, including those who may be classified as hedgers and arbitrageurs. If any market, such as pork bellies, had no speculators, only producers and consumers would participate. With fewer players in the market, there would be a larger spread between the current bid and ask price of pork bellies.
Any new entrant in the market who wanted to trade pork bellies would be forced to accept this illiquid market and might trade at market prices with large bid-ask spreads or face difficulty finding a co-party to buy or sell to. By contrast, a commodity speculator may profit the difference in the spread and, in competition with other speculators, reduce the spread; some schools of thought argue that speculators increase the liquidity in a market, therefore promote an efficient market. This efficiency is difficult to achieve without speculators. Speculators take information and speculate on how it affects prices and consumers, who may want to hedge their risks, needing counterparties if they could find each other without markets it would happen as it would be cheaper. A beneficial by-product of speculation for the economy is price discovery. On the other hand, as more speculators participate in a market, underlying real demand and supply can diminish compared to trading volume, prices may become distorted.
Speculators perform a risk bearing role. For example, a farmer might be considering planting corn on some unused farmland. However, he might not want to do so because he is concerned that the price might fall too far by harvest time. By selling his cro
Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones; the purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, macroeconomic stabilization. The proper role of government provides a starting point for the analysis of public finance. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently. If private markets were able to provide efficient outcomes and if the distribution of income were acceptable there would be little or no scope for government. In many cases, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time private markets may supply too little of that good.
National defense is one example of non-rival consumption, or of a public good."Market failure" occurs when private markets do not allocate goods or services efficiently. The existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services. Externalities, public goods, informational advantages, strong economies of scale, network effects can cause market failures. Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed "government failure." Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems. In this view, public sector programs should be designed to maximize social benefits minus costs, revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible.
In practice, government budgeting or public budgeting is more complicated and results in inefficient practices. Government can pay for spending by borrowing, although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues; the accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, gives governments an important fiscal policy tool. Deficits can narrow the options of successor governments. Public finance is connected to issues of income distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently; the public choice approach to public finance seeks to explain how self-interested voters and bureaucrats operate, rather than how they should operate. Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and constitute good financial management.
Resource generation, resource allocation and expenditure management are the essential components of a public financial management system. The following subdivisions form the subject matter of public finance. Public expenditure Public revenue Public debt Financial administration Federal finance Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits – such as infrastructure investment or research spending – are classed as government investment. Government expenditures that are not purchases of goods and services, instead just represent transfers of money – such as social security payments – are called transfer payments. Government operations are those activities involved in the running of a state or a functional equivalent of a state for the purpose of producing value for the citizens. Government operations have the power to make, the authority to enforce rules and laws within a civil, religious, academic, or other organization or group.
Income distribution – Some forms of government expenditure are intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services have the effect of changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public road construction transfers wealth from people that do not use the roads to those people that do. Income Security Employment insurance Health Care Public financing of campaigns Government expenditures are financed in three ways: Government revenue Taxes Non-tax revenue Government borrowing Money