Risk can be defined as uncertainty about the events that will occur in the future. Risks are encountered in all areas of life, and become more important when it comes to financial markets. Risk in financial markets is defined as investment securities. If the investment vehicle is government bonds or treasury bills, they are considered to be free of risk. Because of the sudden changes in exchange rates in the process of globalization or fluctuations in interest rates influencing the cash flows of companies, most companies consider hedging as a viable part of the globalization strategy. Risk management policies to ease problems and disasters, which may arise from the use of instruments. The stock market serves as a bridge between economic activity and finance under favor of functions such as reducing the risk of investment, and it meets the capital needs for companies. For this reason, the development of stock markets plays an important role for the global economy and finance. Thus, the aim of this chapter is to introduce financial risks and their effect on common stocks.
TopThe Nature Of Stock: Stock Types, Rights And Valuation
Stock is a financial asset, which represents and expresses the shares at limited partnership divided into shares with join stock company (Weston, et al., 1996:281-329; Gitman and Madura, 2001:551-580; Sarıkamış, 2000: 31). In a joint stock company, the amount of capital divided into shares and each stock represents to participating nature and pro-rota hosting (Hoover, 2005:28-38; Rodoplu, 2001:291). Join stock companies supply with export to their stocks for provide to shareholder’s equity. Business may not release to public to all of the stock issued ((Hoover, 2005; Fabozzi and Mann, 2005; Gitman and Madura,2001; Ceylan and Korkmaz, 2000:91).
On the contrary of bill of exchange, stock is a document of partnership. With this state, stock is a financial asset which is senior security on the stage of establishment and it is the latest reimbursement in case of dissolution of a partnership by Joint Stock Company (Weston, et al. 1996:295-297;Sarıkamış, 2000:31). Stock yields money to shareholder during to continue of joint stock company and during to make a profit. But stock’s income isn’t fixed as well as bill of exchange (Karslı, 2000:362).
According to legal system, shareholder is accepted as partner of company. For that reason, share is abstract legal status which is separate from the owner’s personality. Thus stock is indivisible whole in the face of company (Rodoplu, 2001:292).
Stock Market in which equities are issued and traded has significant role in economic development. Economic functions can be mentioned as follows (Gitman and Madura, 2001:22-44):