Financial instruments package financial capital in readily tradeable forms. Their diversity of forms mirrors the diversity of risk that they manage. Financial Instruments can be categorised according to whether they are securities, derivatives of other instruments or so called cash securities. They can be categorised by 'asset class' depending on whether they are equity based or debt based. If it is a debt security, it can be further categorised into short term or long term. Financing a company through the sale of stock in a company is known as equity financing. Alternatively debt financing can be done to avoid giving up shares of ownership of the company.
Equity Finance
There are a variety of forms of shares, ordinary shares entitle the holders to the remaining distributable profits after prior interests e.g. creditors and prior charge capital have been satisfied. Preference shares, which carry a fixed rate of dividend. Preference shareholders have a prior claim over ordinary shareholders to any company profits available for distribution.
Bonus issues are when a company offers new shares to shareholders in proportion to the number that they already own, but without asking for more money.
A warrant is essentially a long-term option on the shares of a company; it entitles the holder to purchase a stated number of shares at a specified price up to a certain date.
Rights Issues is the most commonly used method of issuing shares involves offering new shares to existing shareholders in proportion to the number of shares already held at a price lower than the current market price.
Debt Finance
A convertible loan carries as one of the terms of issue the option for the holder to convert his stock within a given time period int ...