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SHORT TERM INVESTMENTS -INVESTMENT IN MARKETABLE SECURITIES. Companies and other organizations sometimes have a surplus of cash and become cash rich . A cash surplus is likely to be temporary, but while it exists the company should seek to obtain a good RETURN by investing or depositing - PowerPoint PPT Presentation



    Companies and other organizations sometimes havea surplus of cash and become cash rich.A cash surplus is likely to be temporary, but while it exists the company should seek to obtain a good RETURN by investing or depositing the cash, without the risk of a capital loss (or at least, without the risk of an excessive capital loss).Three (3) possible reasons for cash surplus are:Profitability from the trading operations.Low capital expenditure, perhaps because of an absence of profitable new investment opportunitiesReceipts from selling parts of the business.

  • Reasons for keeping surplus fundsThe board of directors might keep the surplus in liquid form:

    a)To benefit from high interest rates that might be available from bank deposits, when returns from re-investment in the company appear to be lower.b)To have cash available should a strategic opportunity arise, perhaps for the take over of another company for which a cash consideration might be needed.c)To buy back shares from share holders in the near future.d)To pay increased dividends to share holders.

  • Temporary cash surpluses are likely to be:

    Deposited with a bank or similar financial institutions (With bank deposit the risk of capital loss is minimal.

    Invested in short term debt instruments. Debt instruments are debt securities, which can be traded (Any capital loss should not be large because of the short term of the maturity).

    Invested in longer term debt instruments, which can be sold on the stock market when company eventually needs cash. ( Risk of Capital loss)

    Invested in shares of listed companies which can be sold on the stock market when the company eventually needs cash (Risk of Capital loss

  • Marketable SecuritiesMarketable Securities are investments (or are derived from such investments) in companies, government entities and/or market indices. Marketable securities are generally "liquid" in that they can usually be sold (converted to cash) with relative ease on a securities exchange or market

  • YIELD OF MARKETABLE SECURITIESDefault Risk(Credit Risk) When a borrower does not fulfills the contractual obligations regarding the Principal & Interest payments.Marketability. It means the ability of the owner to convert a marketable security into cash (Price and Time required). The lower the marketability of the security the greater yield is required to attract the investor.Maturity: The longer the maturity the greater the risk of fluctuation in market value of the security (Risk premium demands increases)Coupon Rate: Besides maturity the price fluctuation of security also depends upon the level of the coupon rate. For fixed income security the lower the coupon rate, the greater the price change with the shift in interest rate. Volatility of security depends upon both maturity and Coupon rate.Taxability: It also affects the market yield of the security. Income from certain Government securities are tax exempt therefore they sell in market at lower yields to maturity than Corporate securities of the same maturity.

  • COMMON TYPES OF MKTBLE SECURITIESThe most common types of Marketable Securities are:

    Equity Securities Bonds Fixed Income Securities Option Securities Mutual Funds Unit Investment Trusts Commodities Derivatives

  • EQUITY SECURITIESEquity SecuritiesEquity securities or stock represent an ownership interest in a company. The owner of an equity security, the shareholder, is apro-rata owner of the issuing company.

    Equity securities generally pay shareholders periodic dividends. Dividends are pro-rata payments to the shareholders, paid from thecompanys earnings. Essentially, dividends help the company distribute its earnings to its owners.

    Dividend payments must be declared by the companys Board ofDirectors

  • KEY FEATURES OF EQUITY SECURITIESPar Value :For accounting purposes, equity securities are assigned a Par Value at the time of issuance. The Par Value of a security, which is expressed as an amount per share, has no impact on the issue price or market value of the stock.Traded on an Exchange or Market :Equity securities are generally traded on either one of the listed stock exchanges or on the Over-the-Counter market. The market value of equity shares is influence by prevailing economic conditions such as the companys performance (ie. earnings) supply and demand and interest rates. Limited Liability:Shareholders of equity securities enjoy limited liability from the consequences of the actions or deeds of the corporation and/or its corporate officials and employees. The shareholders liability is generally limited to the original amount of the investment plus the Par Value of the shares owned.Therefore, in the event of a liquidation or lawsuit, the personal assets of a firms equity investors are not available to the firms creditors and cannot be claimed as part of a legal settlement. In addition to the original investment amount, shareholders are liable for the Par Value of the shares owned. Therefore, it is in the best interest of the equity investor that the Par Value be set as low as possible at the time that the shares are issued.

  • Classes of Equity Securities Different classes of equity securities exist:Common Stock Preferred StockThe primary differences between Preferred Shares and Common Shares are:The dividend rate on Preferred Shares is usually fixed Owners of Preferred Shares receive dividends ahead of common shareholders In the event of a liquidation, Preferred Shareholders have a prior claim to assets over common stock owners

  • The dividend rate on Preferred shares is usually fixed. This rate is generally expressed as either: an annual dollar amount per share - $2.50 per share an annual percentage of the Par Value of the stock 5% per shareVoting vs. Non-Voting StockBecause equity securities represent an ownership stake in the company, shareholders generally have a voice in certain corporate decisions. Shareholders are often permitted to vote on important corporate matters at the annual shareholders meeting. Generally, shareholders are entitled to one vote for each share of stock owned.

    In some cases, however, equity securities are issued solely to raise capital and it is not the intention of the Board of Directors to convey voting rights to the shareholders. In this case, Non-Voting stock is issued. Shareholders of Non-Voting stock are still entitled to dividend payments from earnings, but are not empowered to vote on corporate affairs at the annual meeting

  • Restricted Stock

    In certain cases, shareholders receive their shares as part of a special distribution or incentive plan. Often, the terms of these distributions or plans prohibit the sale of these securities for a set period of time. To prevent the holder from selling these securities prior to the proscribed date, Restricted Securities are issued.Restricted securities contain a printed legend on the face of the stock certificate that prohibits the sale of the shares until the restriction period is ended. The legend is generally printed in red so that it stands out, and prevents the Stock Transfer Agent from transferring the shares out of the customers name, thereby preventing the securities from being sold before the end of the restriction period. Once the restriction period is ended and the restriction is lifted, it is permissible for the shareholder to sell the shares

  • Convertible BondsConvertible Bonds are fixed income securities that are readily convertible into shares of the issuing companys stock on or after a pre-determined date. This means that holders of Convertible Bonds will eventually receive equity securities as a result of their investment.As such, Convertible Bonds are treated as equity securities for accounting and tax purposes and are therefore mentioned in this section.

  • American Depository Receipts ADRs An American Depository Receipt is an investment security created by a US Bank or custodian. The US Bank holds the stock certificates of a foreign entity which are traded on a foreign exchange or market in its vault. The bank or custodian issues a domestic ADR equity security that is collateralized by the foreign securities held, and is traded on a US exchange or market. ADR securities are created to alleviate the difficulties involved in transferring securities from one country to another and in converting currencies in the buy and sell process, making it easier for US investors to invest in foreign securities.To the investor, an ADR represents a receipt of ownership of the foreign securities that are held on deposit at the American Depository. The ADR securities are traded in US currency and are readily transferable from one investor to the next.

  • ADR EXAMPLEFor example, assume that MAJOR US BANK acts as custodian for INTL Co., a foreign security which trades on a foreign exchange. MAJOR BANK holds 300,000 shares of INTL Co. common stock in its vault. MAJOR issues 300,000 shares of INTL ADR a domestic security that trades on a US stock exchange. Each domestic ADR represents one share of the foreign stock INTL Co.The one-for-one relationship in the preceding example between the foreign securities held and the ADRs issued is not a requirement. ADR securities are often issued to represent multiple shares of the foreign security.For example, MAJOR might have instead issued only 30,000 shares of INTL ADR, each ADR share representing 100 shares of the foreign INTL stock

  • Bonds Fixed Income Securities To raise required funding, Corporations and Government entities borrow money from individual and institutional investors by issuing bonds or debt securities. Issuers of debt securities offer to pay a certain rate of

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