An Insurance Policy That Can Also Be Classified as a Securities Product Is Called
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Types of securities
DIALOGUE 1
Read and translate the post-obit dialogue:
A. | You see, I�ve found myself in a real predicament � . I cannot brand out the difference betwixt �stocks�, �shares� and �securities�. |
B. | Oh, really? In a nutshell, in Great britain stock is used to refer to all kinds of securities, including government bonds. The word equity or equities is besides 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 visitor � . |
B. | And it is really so. Let�due south get this right from the start. Buying in a company is divided amongst stockholders or shareholders. The original shareholders are the people who started the business concern, but now they accept 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 tin easily buy into the company. |
B. | To a certain extent, yes. For public companies the shares or stocks tin be resold on the stock commutation to anyone prepared to pay the going price. Mind that even the largest company occasionally needs to issue boosted new shares to heighten money for particularly large projects. |
A. | So to buy into the company, a shareholder must purchase shares on the stock exchange. |
B. | Absolutely right. Every bit a reward for this initial outlay, shareholders earn a render in two ways. Outset, the visitor makes regular dividend payments, paying out to shareholders that function of the profits that the visitor does not wish to re-invest into business. Second, the shareholders may make capital gains (or losses). |
A. | And so, if you buy visitor X shares for � 600 each and then everyone decides its profits and dividends will be unexpectedly loftier, yous may be able to resell the shares for � 650, making a capital letter gain of � l per share on the transaction. And if the company suffers a loss or goes bankrupt? |
B. | The shareholders of the visitor have limited liability. The nearly they can lose is the coin they originally spent ownership shares. |
A. | If the company stops trading considering it is unable to pay its debts (goes bankrupt), or has to sell all its avails to repay part of its debts (goes into liquidation), is there any adventure for the shareholders to go at least part of their money back? |
B. | It depends. There are commonorordinary shares,andpreference sharesorpreferred stock.Holders ofpreference shares receive a stock-still dividend that must be paid earlier holders of ordinary shares receive a dividend. |
A. | I see � . And so, holders of preference shares have more chance of getting some of their capital back in the case of defalcation. |
B. | Yes, they are repaid before other shareholders, merely subsequently 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 brand head or tail of it � . |
B. | And I know it upward 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 every bit those, represented by an choice, 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 bail-holder in the meantime. |
A. | I suppose that the price written on the share, the nominal value, is hardly ever the aforementioned as the price it is currently being traded on the stock exchange. |
B. | Absolutely correct in every detail. The market toll depends on supply and demand and can modify every infinitesimal during trading hours. Traders in stocks quote bid(ownership) andoffer(selling) prices. The spread or divergence between these prices is their profit. |
A. | Very reasonable. And what almost options? Are they too traded on the stock commutation? |
B. | Of grade. Really, it�south a contract giving the holder a correct to purchase a designated security (this is a call option) or sell information technology (this is a put option) at or within a certain catamenia of time at a specified price. |
A. | If I�thou not mistaken in a number of companies apart from salary an executive�s compensation package can include share options, the right to buy the visitor�s shares at an advantageous price. It�s a kind of benefits or perks. |
B. | Exactly. Oh, I must be going. I�ve lost rail of fourth dimension. |
A. | Give thanks you very much for helping me to come to grips with the trouble. |
Task 1. Report the dialogue. Use the following reporting verbs:
� to acknowledge that | � to explain that |
� to surmise that | � to discover 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 purchase into the company
b. difference between ordinary and preferred stocks
c. difference between stocks and bonds
d. departure between securities and derivatives
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Job 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-fries, FTSE, LIFFE, futures contracts, forward contracts, LIBOR, warrant, subscription right in the Internet to find further information about ane of these items. Make apply of helpful phrases from the dialogue higher up.
Although it sounds similar it might be the hobby of your neighbour 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 sympathise hedging is to remember of it as insurance. Hedging occurs nigh everywhere, and we encounter it everyday. For example, if you lot buy house insurance, you are hedging yourself against fires, break-ins, or other unforeseen disasters.
Portfolio managers, individual investors, and corporations utilise hedging techniques to reduce their exposure to various risks. In fiscal markets, however, hedging becomes more complicated than just paying an insurance visitor a fee every year. Hedging against investment hazard means strategically using instruments in the market to start the risk of any agin cost movements. In other words, investors hedge one investment by making another. Technically, to hedge you lot would invest in 2 securities with negative correlations. Of course, zilch in this earth is gratuitous, so you nevertheless have to pay for this type of "insurance" in i class or another.
For the most office, hedging techniques involve using complicated fiscal 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 nugget[13].
With these instruments you lot can develop trading strategies where a loss in one investment is showtime past 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.
Nosotros've been comparing hedging versus insurance, simply we should emphasize that insurance is far more precise than hedging. With insurance, y'all are completely compensated for your loss (usually minus a deductible[14]). Hedging a portfolio isn't a perfect science and things tin go wrong. Although adventure managers are always aiming for "the perfect hedge," it is difficult to achieve in practise.
Because risk is an essential element of investing, you lot should gain a fairly good awareness of how investors and companies work to protect themselves.
Many large 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 reach hedging, including insurance policies, forward contracts, swaps, options, many types of over-the-counter and derivative products, and perchance nearly popularly, futures contracts.
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