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Proprietorship or Partnership
Once the business is established the firm (proprietorship or
partnership) may need additional fund:
To run and support day to day operations
For expansion of business
For acquiring or purchasing fixed assets.
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PRIVATE LIMITED COMPANY: Characterized by minimum 2 and
maximum 50 shareholders who are owners or equity capital providers or founders
of business. Shareholders investment in firm is determined by Authorized Capital
(amount of share capital a firm can utilize in business) and the value of each share
stated in the firm’s Memorandum of Association.
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PUBLIC LIMITED COMPANY
Generally characterized by minimum 7 and maximum any number
of shareholders (owners or equity capita providers). Shareholders
investment and maximum number of shareholders is determined
by the amount of Authorized Capital and the face value of each
share stated in the Memorandum of Association of the company.
PLC’s are allowed to issue a prospectus in primary market,
which invites public to buy the company’s securities such as stock
or bond.
Public will not be interested to give fund to the company by
buying its stock or bond from the primary market, if they cannot
sell the company’s stock or bond they own when in need of
money.
So, PLC’s are allowed to get enlisted with SEC (Securities
Exchange Commission) which allows the company to trade (buy
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or sell) its stock or bond in stock exchange or secondary market.
PUBLIC LIMITED COMPANY
PLC can also raise initial or new capital by borrowing loan
capital (in addition to owner’s capital). Such as short-term or
long term bank loan or by issuing debt obligations also
known as debt instruments or certificates such as bond or
debenture
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PUBLIC LIMITED COMPANY
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Financial Market
Financial market contains both suppliers of fund and borrowers of fund.
The financial market is composed of a number of financial institutions (such
as banks, investment intermediaries, insurance companies) also known as
financial intermediaries that pool resources and channel funds from savers
or lenders to spenders or borrowers. Smooth functioning of these
institutions is very important for an efficient financial market and for the
conduct of fiscal and monetary policies.
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FINANCIAL MARKET
Money Market: is for short term financial securities (with
maturity < 1 year)
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2. Direct finance is a method of financing where borrowers
borrow funds directly from the financial market without using
a third party service, such as a financial intermediary. Direct
financing is usually done by borrowers that sell securities
(stock or bond) to raise money and avoid the high interest
rate of financial intermediary (e.g. banks).
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Why are Secondary markets (stock exchange) important?
Secondary market makes financial instruments (e.g. stock
or bond) more liquid. It becomes easier to convert those
financial instrument or securities into cash.
Due to liquidity of the financial instruments in secondary
market, they become more desirable to investors or general
people.
The trading of company’s stock or bond in stock exchange
make it easier for the company to sell their shares in the
primary market to general public.
The bond market is dominated by the fixed income government debt instruments.
The maximum savings of small investors are mobilized by only one instrument
name National Saving Certificate. The interest on this saving certificate is higher
than that of other bonds in the market. Besides the national saving certificate, the
other government debt instruments are treasury bills and treasury bonds. There
are 5, 10, 15 and 20 years maturity treasury bond. Bank and financial institutions
are the main buyers of treasury bonds. Commercial banks have obligation to
purchase government securities as it is accepted as security to meet their
statutory liquidity requirement (SLR) under the Banking Companies Act. This is
still a small market. Banks and financial institutions which have SLR obligations
are the only participants in this market. The government bonds are rarely traded
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on the stock exchanges.
The corporate bond issues had been very occasional and had been stagnant due
to a lack of varied corporate debt supply. This is because, in general, companies
prefer to rely on banks for funds rather than on the bond market, thereby avoiding
the need to comply with disclosure and governance norms. As on November,
2011, only eight debentures exist in the Dhaka stock exchange. No new debenture
was issued after 1999. Besides these, ten debentures already went to maturity.
Only three corporate bonds are trading in the capital market (CSE & DSE) which
are IBBL Mudaraba perpetual bond, ACI zero coupon bond & Subordinated bond
of BRAC Bank.
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