Financial Assets


By

Utkarsh Srivastava
Management Student
NSB, NIILM School of Business
New Delhi
 


MEANING OF FINANCIAL ASSETS: - Financial assets are assets which are needed by firm to carry on its business. These Assets may be tangible or intangible. All assets need finance through any where either by lenders or by companies own savings. Most of assets are financed through selling pieces of paper called financial assets, instrument and securities. These papers have a value in exchange because they are claims on the assets of the firm's assets and to its future cash flow. Offers the future cash flow is called 'issuer' and who invest in that is called 'investor'.

CLASSIFICATION: - companies issue different type of instrument/securities for collecting funds. Depending upon the different types of investor companies issue different types of instrument/securities and it deepened on the nature of return or claim.

Financial assets may be classified as:

a) Equity share/instrument/MF/insurance /gold/commodities.
b) Debt instrument like debenture, bounds or term loan.
c) Preference share

On the basis of financial issuer, financial assets /securities are classified as,

1) Primary securities or direct securities.
2) Secondary securities or indirect securities.
3) Derivatives

1) PRIMARY SECURITIES: - this type of securities is called 'direct securities'. As the name suggest these type of securities are issued directly by the ultimate borrower to the ultimate sever or investors. Equity Shares, preference shares, debenture, bounds under this, such types of securities comes.

2) SECONDARY SECURITIES :-As the name suggest, secondary securities are the securities which are not issued directly by ultimate borrower, these securities are issued by financial intermediaries to the ultimate saver or investor  like insurance policy, unit of mutual funds, bank deposit etc. that's why secondary securities is called 'indirect securities'.

3) DERIVATIVES: - Derivatives are the financial instruments whose value is derived from the value of an underlying finance instrument such as a treasury bill, a bond or a note an individual equity. The financial derivatives include forwards, futures operation, swaps, warrants or a mix of these. The important types of financial assets such as shares, debentures, hybrid securities.

SHARES: - The term share means "ownership of particular limited area".  In other words a share is a share in the share of a company. If someone buys ordinary shares of any company he will become owner of that much share. He will have right to influence decision in the company's annual general meeting. Equal part of capital is called share.

Every company has a statutory right to issue its shares except a company limited by guarantee. It is more easy and universal form of raising long term fund from the market.

Sec. 2(46) of the companies Act, 1956 defines it as "a share in the share capital of a company, and includes stock except where distinction between stock and shares is expressed".

Kinds of ownership securities or shares

Companies issue different types of share to mop up funds from various investors. Before
Companies Act, 1956 public companies used to issue three types of shares i.e. preference shares, ordinary shares and deferred shares. The companies Act, 1956 have limited the type of shares to only two-preference shares and equity shares.

In some countries like Canada and U.A.S. certain companies issue another type of shares called 'no par stock'. But these shares, having no face value, cannot be issued in India. No par stock/shares means shares having no face value. The capital of a company issuing such shares is divided into a number of specified shares without any specific denomination. The share certificate of the company simply states the number held by its owner without mentioning any face value. The value of a share can be determined by dividing the real net worth of the company with the total number of shares of the company. Dividend on such shares is paid per share and not as a percentage of fixed nominal value of share.

EQUITY SHARE

Equity shares are also known as common or ordinary shares. Represent 'ownership' in the company. Equity shareholder is real owner of the company. They have a control over the company works. They are paid dividend after preference shareholders. They get dividend depend on company's profit. Shareholder may not get dividend in any year if company goes in loss and they cannot claim on company to pay their dividend in any year. May be company can't pay dividend in any profit year in this situation shareholder cannot force to paid their dividend. That's way shareholder gets more dividend as compare to preference shareholder or other securities (depend on situation).  Equity shareholders are paid divided at last after all obligation paid. Equity share capital cannot be redeemed during the life time of the company. However the companies (Amendment) ordinances (October 31, 1998 and january7, 1999) have allowed companies to buy back their own shares subject to regulations laid down by SEBI.

PREFERENCE SHARE

As the name suggest, these shares have some preferences compare to other types of shares. This type of share's dividend is paid before equity share's dividend. On the basis of characteristic of Preference share, shares are divided into eight parts and every part has its own characteristic. Preference share is issued with some fixed percentage therefore a fixed rate of dividend is paid on preference share capital. Preference share have not voting rights; so they have no right to influence the management of the company. However, they can vote if their own interests are affected.

Debentures or bonds:

A company may raise long term finance through public borrowings. These loan are raised by the issued of debenture is as acknowledgement of a debt. A debenture-holder is a creditor of the company. Debenture-holder gets fixed rate of interest. The interest on debentures is a charge on the profit and loss account of the company. Debenture-holder cannot take part in company meeting. Debenture-holders gets first their interest and periodically (as the case). Company has to pay first its obligation after that from the rest of the profit company can give divined.

Mutual fund: - A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes


The meaning of insurance: - Insurance is a policy from a large financial institution that offers a person, company, or other entity reimbursement or financial protection against possible future losses or damages.

Commodity: - 1. A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be.

2. More generally, a product which trades on a commodity exchange; this would also include foreign currencies and financial instruments and indexes.
 


Utkarsh Srivastava
Management Student
NSB, NIILM School of Business
New Delhi
 

Source: E-mail November 11, 2010

 

           

 

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