In terms of long term investments in a corporation, publicly held corporations issue securities that can be broadly described as:
- 1) Debt
Generally, each security carries with it attributes in relation to
- 1) the risk of loss of the investment; and
- 2) the power to control the business; and
- 3) the ability to share in success of the enterprise.
Investment in the different securities depends upon the purchaser's willingness to trade the risks associated with each security with its return. In order to induce investors to turn their capital over to a business, investors need an expectation of some return. The return should compensate for inflation (the fact that money loses value over time, i.e., a dollar today is more valuable than a future dollar), for risk (the fact that any investment except United States government guaranteed securities have the risk of nonpayment) and for lost opporutnity (that investment in one business means the funds cannot be used for other investments). The interest rate that creditors are paid on their loans and the dividends paid and expected to be paid to equity reflect this compenstaion. Since all business investments involve inflation and loss opportunities, risk is the primary factor to be weighted against potential return in deciding amoung business investment opportunities. Because all the securities described involve long term investment, there is additiona risk resulting from the duration of the investment.