Financial markets provide their participants with the most \rfavorable conditions for purchase/sale of financial \rinstruments they have inside. Their major functions are: \rguaranteeing liquidity, forming assets prices within \restablishing proposition and demand and decreasing of \roperational expenses, incurred by the participants of \rthe market.

Financial market comprises variety of instruments, hence its \rfunctioning totally depends on instruments held. Usually it \rcan be classified according to the type of financial \rinstruments and according to the terms of instruments¡¯ \rpaying-off.

From the point of different types of instruments held the \rmarket can be divided into the one of promissory notes and \rthe one of securities (stock market). The first one contains \rpromissory instruments with the right for its owners to get \rsome fixed amount of money in future and is called the\rmarket of promissory notes, while the latter binds the \rissuer to pay a certain amount of money according to the \rreturn received after paying-off all the promissory notes \rand is called stock market. There are also types of \rsecurities referring to both categories as, e.g., \rpreference shares and converted bonds. They are also called \rthe instruments with fixed return.

Another classification is due to paying-off terms of \rinstruments. These are: market of assets with high liquidity \r(money market) and market of capital. The first one refers \rto the market of short-term promissory notes with assets \rage up to 12 months. The second one refers to the market of \rlong-term promissory notes with instruments age surpasses \r12 months. This classification can be referred to the bond \rmarket only as its instruments have fixed expiry date, \rwhile the stock market¡¯s not.

Now we are turning to the stock market.

As it was mentioned before, ordinary shares¡¯ purchasers \rtypically invest their funds into the company-issuer and \rbecome its owners. Their weight in the process of making \rdecisions in the company depends on the number of shares \rhe/she possesses. Due to the financial experience of the \rcompany, its part in the market and future potential shares \rcan be divided into several groups.

1. Blue Chips

Shares of large companies with a long record of profit \rgrowth, annual return over $4 billion, large capitalization \rand constancy in paying-off dividends are referred to as \rblue chips.

2. Growth Stocks

Shares of such company grow faster; its managers typically \rpursue the policy of reinvestment of revenue into further \rdevelopment and modernization of the company. These \rcompanies rarely pay dividends and in case they do the \rdividends are minimal as compared with other companies.

3. Income Stocks

Income stocks are the stocks of companies with high and \rstable earnings that pay high dividends to the shareholders. \rThe shares of such companies usually use mutual funds in the \rplans for middle-aged and elderly people.

4. Defensive Stocks

These are the stocks whose prices stay stable when the \rmarket declines, do well during recessions and are able to \rminimize risks. They perform perfect when the market turns \rsour and are in requisition during economic boom.

These categories are widely spread in mutual funds, thus for \rbetter understanding investment process it is useful to keep \rin mind this division.

Shares can be issued both within the country and abroad. In \rcase a company wants to issue its shares abroad it can use \rAmerican Depositary Receipts (ADRs). ADRs are usually issued \rby the American banks and point at shareholders¡¯ right to \rpossess the shares of a foreign company under the asset \rmanagement of a bank. Each ADR signals of one or more shares \rpossession.

When operating with shares, aside of purchase/sale ratio \rprofits, you can also quarterly receive dividends. They \rdepend on: type of share, financial state of the company, \rshares category etc.

Ordinary shares do not guarantee paying-off dividends. \rDividends of a company depend on its profitability and spare \rcash. Dividends differ from each other as they are to be \rpaid in a different period of time, with the possibility of \rbeing higher as well as lower. There are periods when \rcompanies do not pay dividends at all, mostly when a company \ris in a financial distress or in case executives decide to \rreinvest income into the development of the business. While \rcalculating acceptable share price, dividends are the key \rfactor.

Price of ordinary share is determined by three main factors: \rannual dividends rate, dividends growth rate and discount \rrate. The latter is also called a required income rate. The \rcompany with the high risks level is expected to have high \rrequired income rate. The higher cash flow the higher share \rprices and versus. This interdependence determines assets \rvalue. Below we will touch upon the division of share prices \restimating in three possible cases with regard to dividends.

While purchasing shares, aside of risks and dividends \ranalysis, it is absolutely important to examine company \rcarefully as for its profit/loss accounting, balance, cash \rflows, distribution of profits between its shareholders, \rmanagers¡¯ and executives¡¯ wages etc. Only when you are sure \rof all the ins and outs of a company, you can easily buy or \rsell shares. If you are not confident of the information, it \ris more advisable not to hold shares for a long time \r(especially before financial accounting published).

Dr. Goldfinger\rhttp://www.financegaes.com

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