3 Company financing: stock and bond issuance
Compared to other forms of business organisations, public limited companies (Plc) have the additional opportunity to build relationships with financial markets. Public limited companies (called ‘corporations’ in the United States) are those offering portions of their capital to the general public. The public buyers of this capital have ‘limited responsibility’, meaning that they cannot be held responsible for losses in excess of the amount they have invested into a specific company.
Plcs can raise finance by offering their shares for sale on a recognised stock exchange in order to raise capital or issue bonds. But what is a financial market and how can it help Plc’s to find the financial resources they need?
A financial market can be defined as the place in which operators with excess funds (lenders or investors) exchange their resources with those who lack funds (borrowers). Broadly speaking, the financial market comprises two key markets: the capital market and the money market.
The capital market
The capital market is where long-term financial securities are traded. Public limited companies, as well as governments, can issue (sell) securities on the capital market in order to raise funds. As you will see later, companies can issue both stocks and bonds in their respective markets in order to raise long-term finance, while governments can issue sovereign bonds.
The money market
The money market defines the second component of financial markets. Money markets are concerned with the buying and selling of short-term assets characterised by a high level of liquidity. As the name suggests, the financial assets exchanged in this market resemble money, or cash. Commercial papers, certificates of deposit, inter-bank loans, Treasury bills, cash deposits, and sale and repurchase agreements are the six major categories of money-market funding. The money markets are the entities in which mainly central banks and financial institutions deal with short-term lending and borrowing. The various money markets are less relevant in terms of most businesses’ financing strategies.