Investment in single company shares and gilts Coursework

Investment in single company shares and gilts - Coursework Example From the point of view of economics, the act of investment is related to saving or deferring consumption today for the purpose of a better or higher return tomorrow. Interest is the price paid to the investor for waiting or deferring consumption. As consumers, we may invest for a number of reasons. We may invest in a house because we want the comfort of a shelter and a place to hold our belongings, a car to drive us to work, or a beach house to spend the holidays. Investments are also made in financial instruments that have value such as shares, bonds and pension plans. The idea is that the investment should bring us a better level of return in the future. Investments may also be made by corporations of monies kept for the purpose of buying future assets or replacement of machinery etc. The investment made in different types of financial instruments will yield a rate of interest and may increase or decrease in value due to demand and supply or various other factors. Thus investment w ill give one more than one types of return- interest earned and capital gains. The Investment Climate in the UK The UK has a very active financial environment, as London has been one of the most important financial centers of the world for some time now. The main reasons for this are the availability of infrastructure in the shape of the equity and bond markets and money market for local and foreign currencies. The main offices of the Bank of England, the UK’s central bank and many other local and international banks are housed here too, much like Wall Street in New York, USA (Kindleberger, 17). There are thousands of trades done daily on the floors of these banks and exchanges. These trades are directly or indirectly related to trade and commerce and the flow of goods, services and money from one bank or country to another (Ross, 12). The activities in the equity and bond markets may be of primary or secondary nature. Primary activity means the issue of new shares or bonds, and secondary activity means the trading or reinvestment of previously issued shares or bonds. Under the corporate form of ownership, a company can raise capital from the general public by issuing a Prospectus in the newspaper stating the nature of its intended business, and viability and profitability of the same. It is left up to the general public to judge and decide for themselves whether or not to invest in the shares or ownership rights of the business. This is called an Initial Public Offering or IPO if the company is inviting the public to purchase its shares for the very first time. The same activity may be carried out in the bond market which is the market for the issue and trading of debt securities. Bonds signify the debt of a company, and the owners of bonds are called the creditors of the company. Previously issue bonds can also be re-bought or resold at the rates prevailing in the market. Bond and equity markets always travel in the opposite directions. If the equity market is up, the bond market would be down and vice versa (Thau, 3). While the owners of bonds, debentures or debt securities are assured an interest payment at a defined rate of interest, and the price of the market value of their bonds at any time they decide to liquidate their holdings, the owners of equity shares will get a dividend payment based upon the number and value of shares they hold at that point in time. This is usually declared by the Board of Directors based upon the profits made by the company in a particular year. They are under no obligation to declare a dividend and may alternatively decide to plough back the profits into the company, to reinvest in