Equity financing
Equity financing involves a process through which a company engages investors, financiers and other public institutions by offering those shares or a stake in the company in exchange for money as a way of raising capital for the company "How Equity Financing Works", (2019). The parties who invest the company by purchasing these shares are referred to as shareholders. The company issues debentures which serve a receipt and record for the investment made to the company. The shareholder is like co-owners as where the company makes a profit they receive dividends and where the company makes losses they also share in the loss.
Debt financing
Debt financing involves borrowing money from a financial institution or of other parties willing to lend the business or company with a promise of payment after a certain period of time elapses. Essentially party A lends money to party B where there must be some consideration such as interest on the loan to be paid by party B. The loan can either be secured on unsecured depending on the agreement between both parties. In debt financing, the company does not lose shares to the lender unlike in equity financing and payment does not depend on how well the business does it must pay interest to the lender. This interest is limited to the agreed amount say 8% unlike in equity financing where a company makes a lot of profit the shareholder may end up receiving more than he had invested in the company.
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Common stock
These are generally the type of stocks which people invest in in a company by buying shares in the company. Common stock has a higher potential return as they profit from both capital gains and dividends. Unlike preferred stocks, common stocks are prone to high risk as they can lose value at a higher rate depending on the stock markets.
Preferred stock
A small portion of companies will have in addition to common stock, the preferred stocks. The preferred stocks are publicly traded on the stock market just like common stock. Both these stocks allow an investor to claim on the company’s profits and assets. The difference between these types of stocks is mainly on the investment return and risk profile. Preferred stock only benefits from the dividends. The price of these stocks also does not move much as they are contained in a tight band thus the investment returns will come from dividends and not the capital gains.
Federal reserves
The federal reserve of any state is the custodian of money in the economy of that state. The reserve controls the amount of money circulating in the economy by reducing and pumping money into the economy depending on the financial state of the economy.
The control of the circulation of money is done to ensure stability in prices and employment ("Federal Reserve Board - Federal Reserve Act", 2019)
The reserve has three units mainly the governing body whose primary role is formulating monetary policy (THE FEDERAL RESERVE ACT OF 1913, 2019). The board also sets the minimum reserve requirements for banks and the discount rate. The Federal Open Market is the second arm that is responsible for overseeing the operations in the open markets by setting the federation fund rates and the interest rates.
The federal reserve shreds money that is worn out and too old to survive the rough and tumble world of finances and this is where they are taken out of circulation. The shredding of money in places like Atlanta is open to the public however the shredded money cannot be re-used as they are first stamped to indicate that they are void.
The Federal Reserve also conducts research on the economy and produce reports that influence a lot of the decisions and policy in the country (THE FEDERAL RESERVE ACT OF 1913, 2019).
The Federal Reserve acts as a bank for all the banks in the country by storing money and lending them money to meet the reserves minimum requirements. In addition to this, the bank also regulates other banks especially those that may seem to have monopolized the financial sector subject to the Dood Frank Wall Street Reform Act the bank has the mandate to take over controls of these banks in order to stabilize the economic industry.
The Federal Reserve also regulates the level of inflation in the country through the offering of fair credit terms on interest in periods where the inflation rates are relatively and in turn improves circulation of money as more people are able to borrow from banks as a result of favorable interest rates.
Conclusion
The federal bank performs a number of functions which are vital to the development of the economy thus subverting where possible instances of inflation and in turn securing jobs and facilitation of income generating activities.
Reference
THE FEDERAL RESERVE ACT OF 1913 (2019).
How the Federal Reserve Affects Your Life Every Day? (2019). Retrieved from
https://www.thebalance.com/the-federal-reserve-system-and-its-function-3306001
Federal Reserve Board - Federal Reserve Act. (2019). Retrieved from
https://www.federalreserve.gov/aboutthefed/fract.htm
How Equity Financing Works. (2019). Retrieved from
https://www.investopedia.com/terms/e/equityfinancing.asp Staff, M. (2019).What Are the Key Differences Between Debt Financing and Equity Financing ? -- The Motley Fool. Retrieved from https://www.fool.com/knowledge-center/the-key-differences-between-debt-and-equity-financ.aspx (2019). Retrieved from https://repository.library.georgetown.edu/bitstream/handle/10822/553381/robbsCherease.pdf?sequence=1 https://paperap.com/paper-on-essay-america-abolish-federal-reserve-system/
