How a bond fund works
Investing in equities is popular amongst Asian investors. But in the excitement of seeing share prices rise (or fall), many forget that any stock market’s primary role is to allow companies to raise capital.
As the Asian economies have grown, their companies have increasingly gone to the stock market to raise funds. Asian governments, recognizing the importance of the stock market in funding growth, have introduced regulations aimed at making the markets more efficient and transparent.
As a result, the number of companies raising cash on the stock market has grown over the past decade. Stock markets have appeared where once there were none, such as in China.
This booklet provides the general investor with background information on the equity market and is part of our commitment to aid investors in choosing funds that are appropriate for their needs and objectives.
The low down on Equities
In simple terms, equities are stocks or any other securities representing an ownership in a company.
Equity markets are perhaps the largest investment asset class from an investor’s perspective and encompass all aspects of owning, trading and hedging risk in shares of companies.
Origins of Stock Markets
In the beginning, stock market trading was on an informal basis between individual merchants. Gradually as the number of merchants grew, the idea of pooling funds together to invest in large business ventures was formed. Each merchant’s contribution to the venture was represented through a single unit or what is known as a share.
As the trading volumes grew, the idea of a more organized venue to exchange shares fell into place, leading to the creation of the stock exchange.
Significance of Equity Markets
From a commercial perspective the equity market is absolutely fundamental to any economy as it is the most common method a company will use to raise money outside a debt market (loans and bonds).
A company generally has four options for raising funds for investment and expansion. Options 1 and 2 are generally the primary sources of capital used by businesses.
1. Issue equity
2. Sell a bond
3. Take up a loan
4. Use its internal reserves
Equity versus Bond
Equity investors stand to benefit/ lose from capital gains/losses if the equity price increases/ decreases after purchase.
Equity investors can also enjoy dividend payments but these are not guaranteed as a company is not obligated to pay dividends.
Bond investors receive a fixed cash flow in the form of coupons. These coupons, unlike dividends, have to be paid at stipulated times; otherwise the firm is in default with its bondholders and can be liquidated. At maturity, the bond investor can expect to receive his original investment.
An equity investor assumes more risk than a bond investor.