The change in capital raising from the real economy to pure speculation

The modern financial world has changed fundamentally in recent decades and is moving further and further away from its original task of equipping the real economy with the necessary funds. While earlier centuries were characterized by direct investments in tangible assets and entrepreneurial activities, complex constructs dominate global trade today. thisDevelopment towards abstract securities raises far-reaching questions regarding the stability and ethical orientation of the markets. It is systemic change that completely redefines the relationship between risk and yield and blurs the boundaries between productive economic activity and pure gambling.

Basic corporate finance mechanisms

Businesses active in the market need constantly fresh financial resources to make necessary investments and to maintain daily operational business. Medium-sized stock corporations use classic instruments such as bank loans or the issuance of fixed-income securities. In these ways, the companies take on debt and have torepay all interest. Alternatively, there is the possibility of increasing your own share capital by issuing new shares, which generates real equity.

The combination of bond and purchase option

The law also allows companies to mix forms in which bonds with additional purchase options are offered to those involved. Fictional examples could include total volumes of 125,000,000 euros at interest rates of 3.25 percent and terms of 5 years. In addition, the financiers receive the right after the end of the initial year for 1,000 euros nominal value 40to purchase shares at a fixed price of 23 euros. Normally, the companies would have to offer interest around 7 percent due to the credit rating by capital market observers.

Benefits for the company and the investors

By adding the purchase option, the interest rate for the company is reduced drastically, which significantly reduces financing costs. For the financiers, this additional quite attractive compensation for the lower basic interest rate represents. If the shares in the stock market rise significantly above the fixed price in the future, considerable profit can be achieved. The parties involvedNot only receive regular interest payments, but also participate directly in the company’s positive performance.

The connection to real economic activity

The right to the subsequent acquisition of shares is securitized by physical certificates and delivered together with the bond. This construct thus contains elements that belong to the futures transactions, but have a direct connection to the real economy. The company initially secures favorable debt capital and, with good business development, converts it into freshequity around. The original purpose of these instruments was in the real financing of growth and expansion.

The triumph of uncovered warrants

In today’s practice, these classic mixed forms hardly play any significant role, as they are largely ignored by the markets. Instead, uncovered warrants have established themselves as pure speculative objects that have lost all connection to the real economy. These papers are issued exclusively by credit institutions and are no longer used for real onesProcurement of capital from industrial or trading companies. It is isolated bets on price development, which exist completely detached from any entrepreneurial activity.

Betting on rising and falling prices

The financial industry has completely undressed these papers and reduced them to their pure speculation core. In addition to betting on rising prices, marketers on the market can now also rely on falling listings. In addition, the rights are no longer limited to company shares, but also include stock market indices, raw materials and food. This development makes it clear how farthe modern financial industry has moved away from its origins.

Huge trading volume on the futures exchanges

At specialized stock exchanges, private investor can choose from numerous 100,000 of these uncovered papers and have their orders executed in seconds. The monthly trading volume reaches immense sums that go far beyond the classic financing needs of specific companies. Even more impressive are the sales on purely electronic futures exchanges, whereNumerous 1,000,000 contracts change hands every day. The total turnover is in this case in dimensions that far exceed the imagination of the general public.