An organization is formed in two ways: 1. When an individual makes an investment to start a business – it is called private business or sole proprietorship. 2. When a group of people (two or more) come together, make investment to run a business, it is called a partnership. What is a Company? The above said partnership is formed with known faces. When unknown people or the general public is incorporated into the partnership, it is called a company. Companies are registered under “Registrar of Companies”. The company is held accountable for the entire liabilities and not the stock holders. What is meant by Stock? The shares released by the companies for the general public to buy is called stock. What is meant by Stock Market? The place where shares are bought and sold is a stock market. Small traders, commission agents/brokers, big traders form the core of this market. The popular stock markets in India are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Worldwide, New York Stock Exchange, London Stock Exchange, NASDAQ and Hong Kong Stock Exchange are extremely popular. What are the different types of Stock Market? 1. Primary Market: When a company issues its first stock to the general public, it is called IPO – Initial Public Offering. 2. Secondary Stock Market: To purchase or sell an existing stock a secondary market has to be approached. After IPO a company’s share is listed in the stock market. After this the investors can sell the shares in the market. The current stock value determines the demand for that company’s share. Who is a Share Holder? The shares released by the companies have a face value determined. Investors who buy these shares at the face value or more are called shareholders. Who are Stock Brokers? The members of the stock market are called stock brokers. The power to buy/sell a share, trade on behalf of an individual/company is vested upon these stock brokers. If you plan to buy a share, you need a stock broker and a DEMAT account. How Stock Market Works? View this post on Instagram A post shared by ManagementGuru (@managementguru) Price of the Stock How Traders Make Money?...

What is Long Term Financing? It is a form of financing that is provided for a period of more than a year to those business entities that face a shortage of capital. Before delving into the advantages of long term financing I would like to present you few fascinating facts on the economy that will blow your mind. Dell “has spent more money on share repurchases than it earned throughout its life as a public company,” writes Floyd Norris of The New York Times.According to Forbes, if a Google employee passes away, “their surviving spouse or domestic partner will receive a check for 50% of their salary every year for the next decade.”Start with a dollar. Double it every day. In 48 days you’ll own every financial asset that exists on the planet — about $200 trillion. Wow…According to Bloomberg, “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.The “stock market” began in May 17th, 1792 when 24 stock brokers and merchants signed the Buttonwood Agreement.The Securities Exchange Act of 1934 creates the Securities and Exchange Commission, charged with the responsibility of preventing fraud and to require companies provide full disclosure to investors.Wall Street was laid out behind a 12-foot-high wood stockade across lower Manhattan in 1685. The stockade was built to protect the Dutch settlers from British and Native American attacks. Sources of Long Term Finance Long-term loans (External)Issue of shares or equitySale and leaseback (Internal)Retained profit Examples of long-term financing include – a 30 year mortgage or a 10-year Treasury note. Financial Markets and Securities Purpose of Long Term Finance To finance fixed assets.To finance the permanent part of working capital.Expansion of companies.Increasing facilities.Construction projects on a big scale.Provide capital for funding the operations. Factors determining Long-term Financial Requirements Nature of BusinessNature of Goods producedTechnology used Long term finance for businesses A Clear Perspective on Break Even Analysis Let us look at some of the Advantages of going for a Debt Financing Option Debt is the cheapest source of long-term financing. It is the least costly because interest on debt is tax-deductible, bondholders or creditors consider debt as a relatively less risky investment and require lower return.Debt financing provides sufficient flexibility in the financial/capital structure of the company. In case of over capitalization, the company can redeem the debt to balance its capitalization.Bondholders are creditors and have no interference in business operations because they are not entitled to vote.The company can enjoy tax saving on interest on debt. Disadvantages of Long Term Debt Financing Interest on debt is permanent burden to the company:  Company has to pay the interest to bondholders or creditors at fixed rate whether it earns profit or not. It is legally liable to pay interest on debt.Debt usually has a fixed maturity date. Therefore, the financial officer must make provision for repayment of debt.Debt is the most risky source of long-term financing. Company must pay interest and principal at specified time. Non-payment of interest and principal on time take the company into bankruptcy.Debenture indentures may contain restrictive covenants which may limit the company’s operating flexibility in future.Only large scale, creditworthy firm, whose assets are good for collateral can raise capital from long-term debt. Financing through Debt Vs Equity There are a number of ways to finance a business using debt or equity. Though the first choice of  many small-business owners would be equity, they may also prefer to utilize some type of debt to fund the business rather than take on additional investors. When done the right way, long-term debt financing provides a number of advantages to the business and its owner. Term Loans from Banks Most banks provide term loans,...

What is your Capital Structure Make up A company in course of charting out its financial schema has to take into account two things. 1) The amount of capital to be raised. 2) Make-up of the capital. Decisions regarding the composition or capitalization are reflected in capital structure. Capital structure of a firm is a combination of debt and equity, which supports long term financing of the firm. The pattern of capital structure has to be planned very carefully by the finance manager in such a way that it minimizes the cost of capital and maximizes value of stocks, thus protecting the interest of the share holders. What is the right capital mix?  There needs to be a right mix of different securities in total cpaitalisation that facilitates control, flexibility and maneuverability. From a broad perspective, following are the three fundamental ways in which the schema of capital structure is finalized: Financing purely or exclusively by equity Financing by equity and preferred stock Financing by equity, preferred stocks and bonds. Which of the above most suits a firm depends on multifarious internal and external factors within which a firm operates. Equity: A firm can raise substantially large amount of fund by issuing different types of shares. The money thus raised is a permanent source of resource and without any obligation to refund to the respective owners. Small and growing companies go for equity fund raising as no banks or other financial institutions are prepared to fund these firms in lieu of poor credit worthiness. Even big corporate firms opt for issuing equities when there is a need to raise large sums. But smaller firms, whose major share of capital comprises of common stock, have to be careful, in that, some large concerns might become interested in controlling these stocks.   Picture Courtesy : GrowthFunders The one big advantage of equity shareholders is that they are free to trade the shares in the market. They can sell the shares to anybody at any time and if the market warrants, at a higher price. One has really nothing to lose, if he is planning to invest in equities. On the other hand, if the company goes bankrupt, the share holders stand a chance to receive only the residual amount, after the creditors’ claims are cleared and satisfied. What’s in it for Investors? Debt: Debt has a maturity date upon which the stipulated sum of principal is repaid. It places the burden of obligation on the shoulders of the company in the form of periodical interest settlements and principal repayments. Creditors can go for legal action if the company defaults in payment of the assured sum on the specific date. That’s why companies think twice before they go for issuing debentures and other bonds. One good thing for the company is that, it can avail tax rebate on the securities of debt, but at the other end it has to satisfy the interest payments and factorise the cost of capital. Cost and Control Principles Cost principle supports induction of additional doses of debt, but it might prove risky, if the company is not able to service the additional debt. Control principle supports the issue of bonds in order to tighten the rein of ownership, but maneuverability principle discounts this and favors issue of common stock to reduce the interest burden. Four factors are important in the purview of the finance manager, cost, risk, control and timing. He should be able to evolve a pattern that satisfactorily brings a compromise among these conflicting factors, which are then assigned weights in the wake of economic and industrial...