Capital is raised by issuing bonds.

10 thoughts on “Eh?”

  1. I wouldn’t be surprised if he’s correct on this one. I wouldn’t know how to prove it, but taking (for example) Royal Dutch Shell as one of the biggest companies in UK/Holland, the balance sheet

    shows that it has built about about $16 bn in ‘Debt’ (aka bonds) and, over the years, has actually spent more on repurchasing shares (aka ‘Treasury’) than the amount of money it ever raised by issuing shares ($545 m).

    Richard M is usually wrong, but not always!

  2. Just try the facts sheets issued by the London Stock Exhcnage and you’ll find I’m right.

    My comments are based on reseacrh.

    The fact that accountants call bonds does not mean they are not capital.

  3. For clarity: I don’t like the term ‘capital’. There is the true capital side (fixed and current assets, machines, buildings etc, what Adam Smith called ‘stock’) and there is the ‘financed by’ or ‘ownership’ side (shares, bonds, retained profits – the distinction between these is rather artificial and is a legal as much as an economic distinction).

    Hence the oft heard statement that “capital is highly internationally mobile” is total twaddle. Factories and mines and offices and shops don’t just get up and move abroad. What they mean is that somebody in Country A who owns ‘capital’ (i.e. a factory, a business etc – whether directly or indirectly) in Country B can easily sell it to somebody in Country C.

    But I agree with RM’s proposition that it is more than likely that UK plc raises more money by issuing bonds than by issuing shares – especially if you minus off the money that UK plc spends on repurchasing shares. Royal Dutch has spent more on repurchasing shares than it ever raised by issuing them, for example.

  4. 3 sources of financial capital for a business – debt, new equity and…very importantly – retained profits in the form of free cash flow.

    What Richard doesn’t cover in his blog is that the each “share” is part ownership of the quity of the business and a claim on the future profits. It is also obvious to state that a firm issuing new, taken up, share capital receives cash…

    The trading of shares on the stock market fulfills a number of roles…..not least signalling investors opinions about the outlook for firms/markets/economies…. That they are freely traded on stockmarkets has obvious benefits

  5. @ Richard M – I’ve had a look at the factsheets and they are unhelpful to the point of being misleading, so I don’t think that they can be used as evidence.

    Although they show (for 2007) that £20bn was raised by share issued by UK plc, they do not show the amount paid to repurchase shares – it is the net figure that matters. Then is the problem that share purchases and dividends are the same thing really, so you could treat dividends paid out as negative capital raising.

    The factsheets also show bonds issued were about £180 bn (nine times the amount of money raised by share issues!!), but only a small part of this is UK plc (one-fifth?), the rest is overseas issuers. Again, the factsheets do not show the amount of bonds redeemed by UK plc (how would they know?), and it is only the net figure that matters. But if you include dividends with share re-purchases, for consistency, you’d have to treat interest payments as bond redemptions, which appears a bit daft.

    So … to prove this one way or another, I’m afraid you’re going to have to do this the hard way, grab the accounts of (say) all the FTSE 30 companies and work out what the figures are (like I did for Royal Dutch Shell).

  6. Divis are paid out of retained profit so if you follow the logic of calcluting that way you would treat non-distributed retained profit as Equity raised…

    Why oh why you’d want to though I have no idea. Richard’s article seems to be a general moan about “the stock market” and those who participate in it – not a serious critique of corporate financing methods

  7. The purpose of the Stock Market is to provide owners of capital in companies the opportunity to lower their risks by diversifying. This is pretty much the opposite of ‘gambling’. And though the source of most companies’ capital is not share issues, it isn’t bonds, either, it is retained profits. I am afraid Mr Murphy stays at the bottom of the class in my view.

  8. BlacquesJacquesShellacques

    Yeah well, Murphy is an eejit, and I can prove this. He deletes comments critical of his own self.

    I do like his point about the stock market being gambling; it tells me all I need to know about his ‘reasoning’ processes. I’d like to know of any activity of anyone ever that is not ‘gambling’.

    I often comment that lefties are innumerate. They sometimes manage to work their way, painfully, through simple arithmetic, then algebra, plane geometry/trig and get a far as calculus, though rarely.

    Then comes the big Kahunah, the real deal: statistics. Bang. Crash. Thump.

    I know they mean well, but Jesus H. Christ – the stock market is gambling? Correct, incorrect, trivial, jejeune and childlike, all at the same time.

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