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Capital market

• Long-term funds are bought and sold:
  • Shares
  • Debentures
  • Long-term loans, often with a mortgage bond as security
  • Reserve funds
  • Euro Bonds

Money market

• Financial institutions can use short-term savings to lend out in the form of short-term loans:
  • Credit on open account
  • Bank overdraft
  • Short-term loans
  • Bills of exchange
  • Factoring of debtors

Differences between shares and debentures

• Shareholders are effectively owners; debenture-holders are creditors.
• Shareholders may vote at AGMs and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors.
• Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest.
• If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made.
• In case of dissolution of firms debenture holders are paid first as compared to shareholder.

Fixed capital

This is money which is used to purchase assets that will remain permanently in the business and help it to make a profit.

Factors determining fixed capital requirements

• Nature of business
• Size of business
• Stage of development
• Capital invested by the owners
• location of that area

Working capital

This is money which is used to buy stock, pay expenses and finance credit.

Factors determining working capital requirements

• Size of business
• Stage of development
• Time of production
• Rate of stock turnover ratio
• Buying and selling terms
• Seasonal consumption
• Seasonal production
• Seasonal cost

Instruments

A contract regarding any combination of capital assets is called a financial instrument, and may serve as a

• medium of exchange,
• standard of deferred payment,
• unit of account, or
• store of value

Most indigeneous forms of money (wampum, shells, tally sticks and such) and the modern fiat money is only a "symbolic" storage of value and not a real storage of value like commodity money.

Capital vs. money

Liquidity requirements of these vary significantly — leading to a diversity of contracts and financial markets to trade them on. When all four functions are served by one instrument, this is called money, which does not need to be traded on financial markets since the risk of loss of value of money is uniform across the whole society. Where no one form of money is agreed to have reliable value, and barter is undesirable, less liquid or more diverse instruments have served the four functions. This article focuses mostly on financial instruments which are not uniformly affected by native currency inflation and which are not guaranteed by a state.

Own and borrowed capital

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named leverage. It has to be optimized as a high leverage can bring a higher profit but create solvency risk.

Borrowed capital

This is capital which the business borrows from institutions or people, and includes debentures:

Own capital

This is capital that owners of a business (shareholders and partners, for example) provide:

• Preference shares/hybrid source of finance
  • Ordinary preference shares
  • Cumulative preference shares
  • Participating preference share
• Ordinary shares
• Bonus shares
• Founders' shares

They have preference over the equity shares.Means the Payment made to the shareholders is done by firstly paying to preference shareholder and then to the equity shareholders.