Fundamental Elements of Financial Market
Risk of Different Financial Assets:
There are many risks on different financial assets, example systematic risk that influence on a large
number of the assets, there can be a significant political event, or there can be effects on many assets, which are in the portfolio. However, if the company has the number of assets, then it is very difficult to get safe from such type of risk. Another risk is the unsystematic risk, which may also refer to the specific risk, this is a type of risk, which affect the small number of the assets that the company has, however, the example of such risk is specific stock, which may be suddenly stricken by the employees. Moreover, to get safe from this risk, diversification can be the way to protect the assets from the risk.
Credit or default risks are also there, it occurs when the company or an individual, unable to pay the interest, based on the contract, or it may be the amount of the debt obligation. The investor when holding the bonds in their portfolio can be affected by such risks, in this risk, there can be the government bonds, which may issues by the federal government, however, on such bond, there is the lowest return rate. The country could be another type of risks financial assets, as when the country is not able to fulfill the financial commitments. Foreign-exchange risk, interest rate risk, political and market risk are the other types of risks that can affect the market (Brigham & Houston, 2015).
Different Bonds and Stocks in Financial Markets:
Many different bonds and stock exist in the financial market, as the government bond, in which there are the fixed incomes securities, such bonds can be classified into the length of time or before maturity. However, bills, notes, bonds, based on the different debt securities can be there in the government bonds. Municipal bonds also known as the munis are another example of a bond, such bonds are free from the federal tax, and furthermore, local governments can give a benefit of such bonds to the public. Muni bond sometimes is a great investment, maybe depends on the personal situations.
Corporate bonds are the bonds known as the issue stock, such bonds have the large corporation and have flexibilities, these bonds are issued in the market, there are generally the short-term corporate bonds, the age may be five years, and the long-term bond may be of 12 years. Corporate bond may have the higher yields and higher risks for the companies as the company quality is most important. Zero-coupon bonds, make the no coupon payments, there is the considerable discount at the par value (Brigham & Houston, 2015).
Different types of stocks are common and preferred stocks, as most of the stocks are common stocks, there can be common shares ownership in a company and dividends can ask for the portion of the profit. However, preferred stock, represent some degree of rights or ownership, in a company as the fixed dividend is there.
Most Important Criteria That a Rating Firm is Using to Rate The Different Financial Assets:
The firms can rate their financial assets through the different criteria, as estimating about the project so that future income and cash flows can be known is most important. There is the need to consider the economic conditions, however, economic projections needed to be forecast. There is the need to do the assessment of the resources and need to notice the future income and cash flow outcomes, the qualitative and quantitative factors should be evaluated so that the leverage, liquidity, cash flow adequacy can also know. Financial indicators and financial flexibility regarding assets and finance needed to be known and evaluate. For a company, there is the need to notice the trends over time and the competition or the peer comparison, the business and governmental entities need to be a focus (Standardandpoors, 2011).
There are the methodologies and the assumptions, about the resources that the company has or need to focus on, however, for the better analysis, the company can follow the notching and analysis of the specific instrument, the priorities within the capital structure are needed to be considered, to define credit risks and the rating opinions. There are need to do the analysis of the potential effects, the debt rating should be done, the enterprise’s assets and the economic entity, while operating the subsidies can also give the specific results.
Dividend Affecting The Price of a Stock:
Ddividend is really affecting the price of a stock, as the dividends are paid the same, as the stock dividends, the company have to pay all the stakeholders or the dividend, from, which the commitment is made. If the company had issued its stock dividends and the company performance is outstanding then through the number of shares there can definitely price of stock, which can be, affect. A number of shares outstanding when divided by the value of the firm, based on the stock prices, as much as the company has the shares outstanding, the price of the stock can be fall in the case. If there is less or few number of the dividends, then there may be less effect on the price of the stock.
Dividends have the rights to the company and are the guarantee to give the common or preferred stock. The stock market is made up of the number or millions of the investors, however, the value of the stock prices may depend on the value that the company is issuing. The investors can be encouraged through stocks, or when the dividend is, given in market. The market is optimistic so the maximum number of stock means the number of the dividends so the price of the stock can be affected by the number of the outstanding shares (Besley & Brigham, 2014).
Total Business Financing is Coming From Bonds and Stocks:
In our businesses, a larger portion of the business financing is coming from the bonds and the stocks, there are many companies that are depending on the bonds and stock because there are getting the finance, based on such factor. However, there are many big companies, which are generating the capital and the profits through the financial related activities, such companies are earning the maximum profit and having the growth from the issuance or giving the stocks.
Companies can generate the profits, in this case, bonds and stocks should be an important consideration, for the business purposes, the companies can have the greater freedom or they are free from the restrictions. The investors may get the benefits from rising the stock prices and companies in the way, get the loans, which they do not need to repay, but the dividend is there, which the company needs to give when there is profit. The governments are also getting benefits from the bonds, the stock, as the country’s capital is rising, and municipal corporations, are getting advantages from the bonds. Moreover, big companies and small companies both are getting compensation and a big portion of the business financing, because resources are there for the companies (McAllister, 2015).
References:
- Besley, S., & Brigham, E. F. (2014). Principles of Finance. Cengage Learning.
- Brigham, E. F., & Houston, J. F. (2015). Fundamentals of Financial Management. Cengage Learning.
- McAllister, J. (2015). The Young Entrepreneur’s Guide to Business, Finance, and Life. James McAllister.
- Standardandpoors. (2011, February 16). Principles Of Credit Ratings – Standard & Poor’s. Retrieved November 2, 2016, from ttps://www.standardandpoors.com/en_US/web/…/1245227392148