Corporate finance

Corporate finance

1. PRIMARY MARKET TO THE SECONDARY MARKET

   • The new issues market (i.e. creation of securities) is called the primary market.
   • The primary market is the market for “new” fnancial products,
   • Conversely, the secondary market is the market for “used” fnancial products.

2. THE FINANCIAL MANAGER

   • Traditionally perceived as a buyer of capital. He negotiates with a variety of investors to obtain funds at the lowest possible cost.
   • is responsible for the company’s fnancial procurement. His job is to minimise the price of the commodity to be purchased, i.e. the cost of the funds he raises.
   • is not a buyer but a seller
   • his aim is not to reduce the cost of the raw material he buys but to maximise a sell- ing price

3. FINANCIAL SECURITIES

   • ISSUANCE OR CREATION OF SECURITIES
     • There is a great variety of fnancial instruments, each of which has the following characteristics:
       • A CONTRACT
         • The essence of fnance is, and will always be, negotiation between an issuer seeking new funds and the investors interested in buying the instruments that represent the under- lying obligations.
       • EXECUTED OVER TIME
         • Time, or the term of the fnancial security, introduces the notion of risk.
       • MATERIALISED BY CASH FLOWS
         • managing rights on the one hand and commitments on the other, both expressed in terms of cash fows.
   • Debt instruments
     • Strictly speaking, investors in these securities do not assume any industrial risk. Their return is set contractually and may be fxed or foating. If it is foat- ing, it will be indexed on an interest rate and not on the results of the company.
   • Equity securities
     • Equity represents the capital injected into a company by an investor who bears the full risk of the company’s industrial undertakings in return for a share of the profts.
   • Other securities
     • fnancial engineering specialists have invented hybrid securities that combine the characteristics of the two categories discussed above.

4. THE FUNCTION OF THE SECONDARY MARKET

   • makes the investor’s investments liquid.
     • Liquidity refers to the ability to convert an instrument into cash quickly and without loss of value.
     • is therefore a zero-sum game between investors, because what one investor buys, another investor sells.
   • plays the fundamental role of valuing securities.
     • the quality of a primary market for a security depends greatly on the quality of its secondary market.

5. DERIVATIVE MARKETS: FUTURES AND OPTIONS

   • Derivatives are instruments for taking positions on other instruments, or “contracts on contracts”. They let you take significant short or long positions on other assets with a limited outlay of funds.

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