Discussing Capital Markets and Banking, Trading
Most of the details below relate to good firm knowledge required in order to achieve a thorough understanding of Markets and the Infrastructure and legal requirements within them. This resource is to assist potential Students of Business and Finance as well as Banking and Business Law. It is regarded as Integreal knowledge for any potential student in these fields, most especially Higher rated courses such as an MSC, MBA etc.
Discussing Capital Markets: An important part of our financial machinery is the Capital Market. Unlike other markets, it has no central place of trading. It is made up of finance houses whose sole or main activity is the sponsoring of capital issues; merchant banks which include these services amongst others such as the financing of trade, acceptance business, and foreign exchange dealing; stockbroking firms who have their own new issue departments, or who participate in other ways; and the much more widely-spread but important participants such as the insurance companies, investment trusts, pension funds, financial institutions, brokers, and jobbers who shoulder vital responsibilities like underwriting.
Although the bulk of the new-issue business is done in the City of London, similar facilities are available in some of the large provincial centres.
The starting point in an offer made under one of the methods already described is for the company seeking capital to consult an issuing house, which will advise on the terms and the best way of handling the operation. The preliminary steps will depend on the nature of the proposition. An issue of stock by a local authority, for example, will be a relatively mechanical task, the main problem being that of hitting the rate of interest which will just ensure success. But in the case of a company, much depends on its nature and whether it is a newcomer to the stock market or an established proposition known to the investing public and the issuing house. If the latter, most of the essential data is already available. The work to be done by the issuing house may therefore be limited to bringing up-to-date the facts to be given in the prospectus, and to settling the terms on which the offer should be made. Quality courses such as the MSc Banking and Finance are exceptional for learning more indepth knowledge in this field.
A newcomer, which may be a one-man business or a private company owned by a small number of shareholders, is however a different proposition. Although its products may be household words, little may be known about its finances, profit record, management, and future prospects. The issuing house may therefore have to start from scratch. It will want preliminary details of the history of the business; its present size and scope; the extent of any export business; who is responsible for its running; the turnover and profits for at least ten years (if it has been in existence for that long); whether sales are going up or down; the nature, extent, and value of the assets; the total and nature of the liabilities; the size and nature of any commitments to build factories or for other capital development; whether the business can be expanded; and the reason for raising new capital, offering some of the existing capital, or otherwise ‘going public’.
The issuing house will expect the potential client to supply most of this information in the form of audited balance-sheets and accountants’ and other reports.
Should this preliminary data indicate that the proposition is worth pursuing, the next step will be to have a closer look at the business, the methods of operation, and the management. A principal, alone or with experts, will make on-the-spot inquiries and get the feel of the firm. ( The Financial Times section for Capital Markets )
The findings will decide the next step, which is to nominate independent accountants to report on the financial side, including the bases for arriving at the profits and for valuing the assets and liabilities, the adequacy of the book-keeping and costing systems, and the degree of control over stocks and expenditure and reviewing Courses such as MSc Finance and related Business and Banking courses are also recommended to expand knowledge in this area.
This second report, which will play a key part in drawing up the prospectus, will reduce the figures to uniform bases so that like can be compared with like after eliminating or including relevant adjustments. While this important work is in hand the issuing house will be making inquiries amongst its many and varied contacts about the standing, competitive nature, and future prospects of the business and the rating of its management.
When all this information is assembled, and not before, the first steps in the final stages can be taken. The best method of making the offer can be worked out. This is when the skill, experience, and knowledge of the issuing house and the stock brokers with whom it is working will become important. Stock markets are live, volatile, ever-changing reflectors of financial and economic conditions. What may be suitable and successful today may be a flop tomorrow. What may suit one type of capital operation may be no use for another. And in the background, when a private business is going to the public, there may often be a tussle of personalities. An individual who has built up a successful enterprise, probably from little or nothing, may be reluctant to part with even a small fraction of the equity: he does not see why anyone else should get a slice of his cake. Check out the Capital Markets resource at Harvard University here.
If however new capital must be raised or (a common reason) provision be made for death duties now or in the future, it will be pointless for him to try to get away with a fixed-interest offer when investors are only interested in equities. Delicate negotiations may thus be needed to reconcile personal with practical market considerations. Another factor which has to be watched is that some sudden unexpected development like a political crisis, a threat of war, or a slump in markets may call for a last minute revision of the issue terms, or even for a postponement. It may therefore be close to the actual date of the operation before the final terms, nature, and method of the offer are settled.
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