There Is More than One Way to Invest

In this section we presented you with the world of investment and with the procedures that an anonymous society must follow for its shares to be quoted on the stock exchange market. We analyzed the characteristics of ordinary and preferential shares and explained with certain details why individuals find attractive to invest their savings in shares and at the stock exchange market, however, as an investor, you should know and be familiarize with another world: the world that is formed by the bond and liability markets.

Debentures Issued by Societies
What different are there between the share markets and the debenture markets? The buying of ordinary pr preferential shares represents an investment in the capital of an anonymous society. In your condition of shareholder you are one of the owners of the company; the fact that your investment is successful or not depends on the success or failure of the company.

When you buy debentures from that same society, what you are doing is that you are lending them money, becoming in this way a creditor no this society. The only to which you have right to is to the nominal amount of the debentures you have in your power plus the interests that the society has promised to pay for the use of your money.

In general, we could say that if you buy debentures the issuing company automatically becomes in debt with you for a determined amount of money. As owner of such debenture you are promised the payment (generally in half a year periods) of a fixed amount as interest concepts during the period of life of the debenture.

The value or price of the debentures varies according to the fluctuation of the interest rates. For example: if the interest rates rise after having bought a determined liability, its value must fall due that its profitability (the interest divided by the value) must be in line with the generality of similar debentures.

The value of a debenture that has a term of amortization of 30 years will be more sensible to the fluctuations of the interest rates than that of a debenture whose terms of amortization are of one or two years. This disparity is due to the fact that the owner of a debenture with a 30-year term is exposed during a long time to the variations of the type of interests.

Anyway, the debentures are very liquid investments, due that they have an active market.

Why does an anonymous society decide to emit debentures instead of shares?  A company whose shares are going to be quoted on the market obtains its capital offering these shares to the investors through an insurance entity. When afterwards they are in need of more capital, the management of the society has in account a series of factors for selecting the most convenient method for obtaining the funds.

The situation of the company, the situation of the market, the nature of the project for which you need the additional capital and the internal characteristics of the own company are some of the factors that have influence on the management for deciding to emit shares or debentures.

When the dimension and profitability of a company grows, it is logical for the expectations on the market towards their debentures to grow, this due that to the market of debentures there usually goes institutional investors or wealthy people whose maximum preoccupation is to preserve their capital and to profit as much as they can. Such investors are more interested in the assets and profitability of the company than in its future perspectives. To decide to buy or not a determined debenture, they usually depend on the services of qualified advisors such as Moody’s Investor Service Inc. or to the Standard & Poor’s Corporation.

This is the cause for why most of the small companies or of recently creation are practically excluded from the liability markets.

The determination of if a company will apply to an emission of debentures or to a public offer of shares. If the securities market is on a rise and the company in question is doing well, the most probable thing is that the insurance entity will advice them to offer shares. It is obvious that if the price of the shares of the company are higher than usual, they will only need to sell a moderate quantity to obtain the amount of money required, with which its share capital will dilute less than of the contrary case. Said in another way:  the assets that are behind each ordinary share will be reducing in less quantity.