money1 - ProFile 1 UNIT 4 Money MONEY FOR INVESTMENT MAKING...

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Unformatted text preview: ProFile 1 UNIT 4 Money MONEY FOR INVESTMENT MAKING MONEY FROM SHARES Money is the life blood of business. When an enterprise wants to grow or invest in new premises or equipment, it is faced with a difficult choice: to borrow from a bank and pay interest on the loan, or to sell shares in the company. When bank interest rates are high, businesses will be more inclined to issue shares. A share issue allows private investors and financial institutions to buy a part of the company on offer. In return, the company receives the money it needs for growth. There are two ways of making money from shares: • from dividends, that is the part of the profit which is allocated to shareholders. • through growth, the increase in value of a share if it performs well. Not only do shares in successful businesses produce high dividends, but the value of the shares appreciate in value. Shares often increase in value if their company is the subject of a takeover bid. However, shares can also lose value to such a degree that they might eventually become worthless. Companies which trade at a loss cannot pay dividends. FLOTATIONS If a company goes public, and offers its shares on a stock exchange then it will have to organize a flotation. Such an issuing of shares, or the flotation of a new company is a delicate business. The shares must be attractively priced without being undervalued. In addition, they need to be underwritten, that is guaranteed by another party which undertakes to buy any shares which remain. This will often be the financial institution which has advised the company. BONDS, STOCKS, AND SHARES Shares are purely risk or venture capital and appreciate or fall in value according to the success of the company and the demand and offer for shares. Bonds guarantee a fixed rate of return on investments plus a promise to repay the original investment. These are used by established companies. See the ProFile Student’s site: INVESTMENT PORTFOLIOS This is why investors should spread their risk across different shares and sectors. They should aim to have a broad portfolio of investments which includes both shares in well-established businesses with a good track record, as well as riskier investments. Shares in successful firms are, of course, a lot more expensive to buy. The safest investments are known as ‘blue-chip’ companies. WE’RE ALL INVESTORS Even though the world of stocks and shares may seem remote to most of us, anyone who has money in a savings account or pension fund is indirectly an investor. Money which is deposited has to work, so is in turn invested. Photocopiable © Oxford University Press ...
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This note was uploaded on 12/12/2010 for the course RBS BCN taught by Professor Dekoe during the Spring '10 term at Rotterdam Business School.

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