The verb finance means to fund. Accordingly, the definition of finance is the management of monetary resources. It includes activities such as borrowing, lending, budgeting, saving, and forecasting.
Corporate Finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.
A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. Capital markets can be both primary and secondary.
In a primary market, a corporation will issue new equity or debt, which is then marketed to investors. In Secondary markets for securities, investors and traders buy and sell existing securities from each other through stock exchanges or alternative trading systems.
Capital markets channel capital from savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Secondary markets provide liquidity and pricing mechanisms to investors.
Money Markets are not considered to be part of the Capital Markets. Money Markets facilitate trading in short-term loans between banks and other financial institutions.
The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year.
Investment Banks play a central role in capital markets. An investment bank is a financial services company that specializes in advisory-based financial transactions on behalf of individuals, corporations, and governments.
Investment bankers help their clients raise money in capital markets by issuing debt or selling equity in the companies. Other job duties include assisting clients with mergers and acquisitions (M&As) and advising them on unique investment opportunities such as derivatives.
Investment Banks are not the only institutions that advice in the intermediation of capital and corporate finance. Management Consulting Firms, such as McKinsey, Bain & Company, as well as the management consulting arms of big accounting firms, such as Deloitte and KPMG, compete with the investment banks for advisory for Mergers, Acquisitions, Corporate Restructuring, as well as other projects relating to Corporate Finance.
In fact, Valuation: Measuring and Managing the Value of Companies, a book published by McKinsey & Co is one of the most utilized academic publication in Corporate Finance.
A particular sector within Investment Banking and Corporate Finance relates to repackaging debt into bigger asset-backed debt structures. Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third-party investors as securities backed by the assets.
An asset-backed security is a security whose income payments and hence value are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets which are unable to be sold individually.
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond).
An asset class is a group of instruments which have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having to do with financial assets.
Credit Rating Agencies
Bond rating agencies are companies that assess the creditworthiness of both debt securities and their issuers. The Big Three credit rating agencies are Standard & Poor’s (S&P), Moody’s, and Fitch Group. S&P and Moody’s are based in the US, while Fitch is dual-headquartered in New York City and London, and is controlled by Hearst.
A stock exchange, securities exchange or bourse, is a facility where stock brokers and traders can buy and sell securities, such as shares of stock and bonds and other financial instruments. To be able to trade a security on a certain stock exchange, the security must be listed there.
Alternative Trading Systems (ATS) are markets where broker-dealers trade assets Over the Counter (OTC). As such they do not have an open order book as liquidity is not centralized.
An investment fund, such as a mutual fund, is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group.
An investment fund provides a broader selection of investment opportunities, greater management expertise and lower investment fees than investors might be able to obtain on their own.
Types of investment funds include:
- Mutual Funds
- Pension Funds
- Hedge Funds
- Sovern Wealth Funds
- Exchange Traded Funds
- Money market Funds
Investment Funds are managed by professional Investment Managers. Mutual Funds and Exchange-Traded Funds (ETFs) are managed by Asset Management Companies. Asset Management can be both active and passive.
A Capital Structure describes the way a corporation finances its assets through some combination of equity, debt, or hybrid securities:
- Equity Capital
- Preferred Stock
Working Capital Management
A company’s net working capital is an accounting concept which represents the excess of current assets over current liabilities. Current assets consist of items such as cash, bank balance, stock, debtors, bills receivables, etc. and current liabilities include items such as bills payables, creditors, etc.
Working Capital Management, or the management of liquidity and timing of in and outflows of capital, is an important field within Corporate Finance. A company’s ability to maintain a solid balance between growth, profitability and liquidity can be a decisive factor for a company’s long term wealth creation.
Other sections of finance
- Asset Management
- Mergers & Acquisitions
- Corporate Restructuring
- Central Banking