Financial Assets: Debit vs Equity Securities.pptx

financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
 Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
 Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
Equity securities as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.

1. Financial Assets: Debt vs Equity Securities https://www.writofinance.com

2. Financial Assets In simple words, financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. F inancial assets are formed for collection of huge amounts of money for business purposes. When an entity agrees for future benefit or payment, in this case, become an issuer of financial assets. The person who shows an interest and holds such asset become investor. Broadly financial instruments are designed to support businesses and economies. Mostly, those individuals or entities invest capital who have surplus of funds, and used for raising of funds.

3. Types of Financial Assets Debt Securities Equity Securities

4. Debt Securities Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset. The type of asset is formed for raising huge amount of capital by governments and corporations, and represents borrowing. Issuer, under the contractual obligations, is obliged to pay the fixed income (interest) and the original payment to the investor when the contract matures. There are multiple types of debit securities depending on investor’s interest, following are the types of debit securities of our concern:

5. The first type of Debit securities is BONDS . Bonds are issued by corporations and government (both local and national government). Bonds contains contractual obligation which must be respected by both issuer and investor. Such contractual obligations contain return of principal amount and interest payment in periods. Principal amount is paid on the maturity date of bond. Periodic interest payments, also known as coupon payment, is paid to investors till bond matures. Bonds are also tradable instrument and its price fluctuations are based on supply and demand, interest rate, and economic conditions. BONDS

6. Notes The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity. Issuer of notes are similar to bonds. They are issues by governments and corporations. Interest payment is made periodically.

7. Treasury Bills The 3 rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments. The interesting thing is that there are no periodic interest payments like bonds or notes. These bills are purchased at a discount value and sold at a face value. The difference between face value, which is the original value, and the value on which the T-bills are purchased is the profit of the investor. Investments in such securities are considered as less risk investment.

8. Certificates of Deposits CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks. Investment in CDs contains time deposit and fixed-interest rate rather than periodic. With time deposit, it simply means that funds are deposited for specified period of time. Fixed interest payment is decided at the time of deposit. The major benefit the investors get is that their principal amount is protected and they get the amount at the maturity of contract along with the interest. However, investor would never make withdraw of money until its maturity.

9. Risk Associated with Debt Securities No investment is free from risk. So think about what if issuer of debit security default on its contractual obligations. Such type of risk is known as CREDIT RISK. Before making any type of investment, it is important to check how much credit worth the issuer have. Reputable institutions like governments and financially stable corporations typically carries low risk of default. INTEREST RATE RISK is one of them to consider. The rise and fall of interest rate may affect the value of debit security. CURRENCY RISK rises when investments are made other than national currency. Exchange rate of currencies depending on floating exchange rate system which can be changed with the passage of time. It may affect the investment’s return.

10. Equity Securities General perception of investment is potential profit either in the form of periodic or fixed term interest, or in the form of dividends. However, in financial world, investment in equity securities confers ownership rights to asset holder. Huge amount of capital is raised by companies. Holder of such securities are residual owner. Their claims are fulfilled only when company pay all their debts and obligation made to others. There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.

11. Common Stock These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made. Such influence can be gained by holding maximum number of shares. The following are the major points of common stocks: Common stocks are issued by company’s owner. Common stock confers ownership rights and their claim on company’s assets and earning is residual in nature. Companies also establish other contracts for capital generation. So, the owner of common stock can only claim for assets and earning when company fulfills other obligations like the fulfilment of contract requirement of debit securities holder. They have voting rights which can be used in decisions related to company’s management especially selection of board of directors. Such privileged position can be achieved only when holders have maximum number of shares.

12. Investment in any financial instruments is made for profit. By holding common stock of company, they may receive dividends. However, it is not certain in this context. Only Board of Directors can decide whether to distribute dividends among common stock holder or to reinvest capital in the company. When it comes to benefit and profit, holders of such instruments can make profit when price of instrument rises in market. however, with potential gains, they can also face price depreciation of stock value. Investors who have the risk-taking abilities and patience can hold such financial instruments. This also provides investors high returns. Investors who do not feel comfortable in such investments opt other investment options which provides them safety of funds.

13. Preferred Stocks Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument. At the same time, it allows holder to claim for fixed payment. It gives this instrument a debit-like quality. The following are the points of preferred stock:

14. As compare to common stock, preferred stock holder contains higher claims to company assets. When company liquidates, holder of such security is paid before common stock holder. A fixed dividend payment is given to common stock holder on specified regular time. Dividends may be suspended only if company faces financial difficulties. No voting rights are given. In the case of company liquidation, debit security holders will be the first one to claim for company assets. Preferred stock holders are not preferred over debit security holders. They are preferred only over the common stock holder.

15. Concluding Remarks Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.