Thursday, May 14, 2009

direct financing

Businesses can start up or expand by obtaining funds directly from households.One way to do so is by selling common stock to the public.Common stock is evidence of part ownership in a corporation;it entitles the owner to vote on certain corporate decisions and to share in any profits.A share of common stock is a financial asset to the owner and a financial liability to the issuer,or corporation.A business can also obtain funds by issuing (selling)bonds.A bonds is evidence that a promise has been made by a corporation to pay a specified amount of money in recognition of a loan to the business.The bond is a financial asset to the lender-owner and a financial liability (debt)to the borrower-corporation.
In bot these examples,direct financing has occurred;businesses have borrowed directly from households.In turn,businesses use these saving funds to make purchases of plant,equipment,and inventory.Markets have evolved to facilitate direct financing.Stocks and bonds are originally sold primary markets;often they are resold(many times),through transactions taking place in secondary markets.Primary and secondary markets are analyzed below.

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