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Types of securities
| A. | You see, I’ve found myself in a real predicament … . I cannot make out the difference between “stocks”, “shares” and “securities”. |
| B. | Oh, really? In a nutshell, in Britain stock is used to refer to all kinds of securities, including government bonds. The word equity or equities is also used to describe stocks and shares. The places where the stocks and shares of listedor quoted companies are bought and sold are called stock marketsorstock exchanges. |
| A. | And I believed that shares are certificates representing part ownership of the company … . |
| B. | And it is really so. Let’s get this right from the start. Ownership in a company is divided among stockholders or shareholders. The original shareholders are the people who started the business, but now they have sold shares of the profits to outsiders. By selling these entitlementsto share in the profits, the business has been able to raise new funds. |
| A. | Well this is it, isn’t it? Then everybody can easily buy into the company. |
| B. | To a certain extent, yes. For public companies the shares or stocks can be resold on the stock exchange to anyone prepared to pay the going price. Mind that even the largest company occasionally needs to issue additional new shares to raise money for especially large projects. |
| A. | Then to buy into the company, a shareholder must purchase shares on the stock exchange. |
| B. | Absolutely right. As a reward for this initial outlay, shareholders earn a return in two ways. First, the company makes regular dividend payments, paying out to shareholders that part of the profits that the company does not wish to re-invest into business. Second, the shareholders may make capital gains (or losses). |
| A. | So, if you buy company X shares for € 600 each and then everyone decides its profits and dividends will be unexpectedly high, you may be able to resell the shares for € 650, making a capital gain of € 50 per share on the transaction. And if the company suffers a loss or goes bankrupt? |
| B. | The shareholders of the company have limited liability. The most they can lose is the money they originally spent buying shares. |
| A. | If the company stops trading because it is unable to pay its debts (goes bankrupt), or has to sell all its assets to repay part of its debts (goes into liquidation), is there any chance for the shareholders to get at least part of their money back? |
| B. | It depends. There are commonorordinary shares,andpreference sharesorpreferred stock.Holders ofpreference shares receive a fixed dividend that must be paid before holders of ordinary shares receive a dividend. |
| A. | I see … . So, holders of preference shares have more chance of getting some of their capital back in the case of bankruptcy. |
| B. | Yes, they are repaid before other shareholders, but after owners of bonds and other debts. |
| A. | Bonds? Are they the same as securities? Let me see … . The dictionary describes securities as “a certificate attesting credit, the ownership of stocks or bonds, or the right to ownership connected with tradable derivatives”. Oh, I cant make head or tail of it … . |
| B. | And I know it up and down and sideways. Security indicates either an ownership position in a corporation (a stock), or a creditor relationship with a corporation or a governmental body (a bond), or rights to ownership, such as those, represented by an option, subscription right or warrant. Thus, bonds guarantee to repay their face value after a certain number of years and pay a fixed rate of interest to the bond-holder in the meantime. |
| A. | I suppose that the price written on the share, the nominal value, is hardly ever the same as the price it is currently being traded on the stock exchange. |
| B. | Absolutely right in every detail. The market price depends on supply and demand and can change every minute during trading hours. Traders in stocks quote bid(buying) andoffer(selling) prices. The spread or difference between these prices is their profit. |
| A. | Very reasonable. And what about options? Are they also traded on the stock exchange? |
| B. | Of course. Actually, it’s a contract giving the holder a right to buy a designated security (this is a call option) or sell it (this is a put option) at or within a certain period of time at a specified price. |
| A. | If I’m not mistaken in a number of companies apart from salary an executive’s compensation package can include share options, the right to buy the company’s shares at an advantageous price. It’s a kind of benefits or perks. |
| B. | Exactly. Oh, I must be going. I’ve lost track of time. |
| A. | Thank you very much for helping me to come to grips with the problem. |
Task 1. Report the dialogue. Use the following reporting verbs:
| · to acknowledge that | · to explain that |
| · to surmise that | · to find out if/whether |
| · to certify that | · to guess if/whether |
Task 2. Work with a partner. Look at the dialogue and discuss what A. and B. say about the following subjects.
a. the ways to buy into the company
b. difference between ordinary and preferred stocks
c. difference between stocks and bonds
d. difference between securities and derivatives
Task 3. Say it in English:
1. цена покупателя
2. купить долю компании
3. опцион покупателя
4. прирост капитала, прибыль на капитал
5. выплата дивидендов
6. обыкновенная акция
7. нарицательная цена, номинальная стоимость
8. обанкротиться
9. первоначальный платеж
10. котируемая компания (акции которой зарегистрированы на фондовой бирже)
11. запрашиваемая цена, цена продавца, цена предложения
12. обусловленное уплатой премии право купить или продать ценные бумаги (товар) по установленному курсу и в определенное время (до определенного момента времени)
13. дополнительные блага, привилегии, льготы
14. привилегированные акции (с фиксированным дивидендом)
15. опцион продавца [на продажу]
16. назначать цену; устанавливать расценки
17. ценные бумаги
18. привилегированное право служащего компании на покупку акции компании по сниженной или фиксированной цене
19. разница между ценами покупки и продажи ценных бумаг,
20. фондовая биржа
21. брит. акционер, владелец государственных ценных бумаг; амер. акционер; пайщик, владелец акции
22. преимущественное право акционера на подписку на вновь эмитируемые акции компании, выпускаемые с целью увеличения ее капитала
23. справиться, одолеть, решительно взяться за решение проблемы
24. приносить прибыль
25. попасть в затруднительное положение
26. выпускать (эмитировать) акции
27. заплатить текущую (действующую) цену
28. продать документ, дающий право на долю в прибылях
29. торгуемый финансовый инструмент
30. свидетельство, дающее своему держателю право купить акции или облигации компании по определенной цене в течение определенного периода
Task 4. Use Supporting Materials to continue the dialogue about securities, financial derivatives and hedging. Search for keywords NYSE, AMEX, treasury bonds, gilt-edged securities, blue-chips, FTSE, LIFFE, futures contracts, forward contracts, LIBOR, warrant, subscription right in the Internet to find further information about one of these items. Make use of helpful phrases from the dialogue above.
Although it sounds like it might be the hobby of your neighbor obsessed with his topiary garden[12] full of tall bushes shaped like giraffes and dinosaurs, hedging is a practice every investor should know about - there is no arguing that portfolio protection is often just as important as portfolio appreciation.
The best way to understand hedging is to think of it as insurance. Hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins, or other unforeseen disasters.
Portfolio managers, individual investors, and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of "insurance" in one form or another.
For the most part, hedging techniques involve using complicated financial instruments known as derivatives, the most common of which are options, futures and warrants, whose value derives from and is dependent on the value of an underlying asset[13].
With these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative. Traders can use derivatives to hedge or mitigate risk by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out.
We've been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible[14]). Hedging a portfolio isn't a perfect science and things can go wrong. Although risk managers are always aiming for "the perfect hedge," it is difficult to achieve in practice.
Because risk is an essential element of investing, you should gain a fairly good awareness of how investors and companies work to protect themselves.
Many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign-exchange rates.
There are many specific financial vehicles to accomplish hedging, including insurance policies, forward contracts, swaps, options, many types of over-the-counter and derivative products, and perhaps most popularly, futures contracts.
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