MARKET ACADEMY
Follow money, ownership and risk from an issuer to an investor.
Follow money, ownership and risk from an issuer to an investor.
A financial instrument is a contract or ownership claim. A share gives an ownership interest in a business; a bond is a debt claim with contractual payments; a derivative links its payoff to an underlying variable. These instruments transfer capital and risk between people who have different needs. A company may need funding today, while an investor is willing to postpone consumption in exchange for an uncertain return.
In the primary market, a new security is sold and proceeds go to the issuer, after fees. In the secondary market, existing securities trade between investors: buying an existing share normally pays the seller, not the company. A liquid secondary market can still help companies raise capital because investors value the ability to sell later. An exchange organizes trading; a broker transmits orders; a dealer may trade from its own inventory.
Every transaction has a buyer and seller. Prices move when the terms on which participants will trade change, not because buyers exist without sellers. Information, financing constraints, liquidity needs and expectations all matter. Market capitalization is a current marginal price multiplied by shares outstanding; it is not a cash balance and does not mean the entire company could be sold at that price immediately.
Market capitalization = share price × shares outstandingIllustration: a firm issues 1 million new shares at $20: gross new funding is $20 million. Later, 100 shares trade at $22: the seller receives $2,200 before fees; the company receives no new funds from that trade.