Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 5 of 25
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The financial system consists of various financial institutions that coordinate money flow between savers and borrowers.
Financial institutions are grouped into two categories
1 · financial markets, direct finance, including the bond market and the stock market
2 · financial intermediaries, indirect finance: including banks and mutual funds
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The two most important financial markets are
· the bond market
· the stock market
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The stock market.
Another way besides selling bonds for Intel to raise funds to build a new semiconductor factory is selling stock (shares) in the company.
Stock represents partial ownership of a firm.
It is a claim to the profits the firm makes, paid in the form of dividends.
If Intel sells one million shares of stock each share represents ownership
of one millionth of the corporation.
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The sale of shares of stock to raise money is equity finance.
The owner of Intel shares is a part owner of Intel.
The sale of bonds to raise money is debt finance.
The owner of Intel bonds is a creditor of (lender to) Intel, to whom Intel is a debtor (borrower).
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If Intel is profitable the shareholders enjoy benefits of these profits, including higher share price and dividends.
Bondholders get interest payments on, and eventual principle repayment of, their bonds.
If Intel has financial difficulty the bondholders are paid in full what they are due before shareholders receive anything.
In the case of bankruptcy of a company stockholders lose their entire investment.
Bondholders receive some of the proceeds of sales the remaining bankrupt company’s assets.
Compared to bonds, stocks offer the holder both greater risk and greater reward.
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bondholders are paid before stockholders
saiken hoyū-sha wa kabunushi mae ni shiharawaru
債券保有者 は 株主前に支払わる
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