Before the thought of another great depression loomed so large, good companies were generally expected to enjoy growth. This is no longer a ubiquitous assumption.

 Crucial factors determining the success or failure of a company these days are neither the company management nor its products - they are primarily the financial institutions and markets that provide the cash flow to enable and support the company's activities. Everything we knew about our financial system is coming under review, but we cannot expect it to undergo drastic and immediate changes.

 The global powers that be are apparently as confused as the rest of us about how best to prevent collapse and improve the system. So we must somehow find the confidence to look to past models for paths to prosperity.

 In the many decades of capitalism preceding the current crisis, a private company looking to grow beyond its private owners' means could raise cash by getting a bank loan. Or it could get existing owners or investors to put up more cash or new investors to put up cash, it could sell assets such as property or it could go to the primary capital markets.

 "Going to the capital markets" means issuing or floating stocks or bonds or derivatives.

 Bank loans are the simplest way, or used to be, when banks had lots of cash and the desire to lend. A private company has to meet certain requirements of the bank to obtain credit and, in turn, the bank has to offer sufficiently attractive terms such as low rates and long repayment periods. Raising cash from investors privately, known as private placement, involves greater risk for the investors, marketing and administration expenses for the company, issues of management control and providing value to shareholders.

 Selling assets involves timing considerations: is this the best time to sell these assets or will they be better priced later? If the assets are unnecessary to the company they may not provide much value. And an important concern is the corporate image created by selling assets.

 Having gone through all these considerations, the company might decide that it would be wisest to go to the primary markets and issue securities. The decision to "float" shares usually depends on such factors - the state of the economy, the state of the capital markets, the appetite of investors. None of these bode particularly well nowadays for the growth aspirations of many companies.

 Nevertheless, once the company makes the flotation decision, it must then decide on the type of security, the basic choice being stocks or bonds.

 Stocks are units of ownership that sometimes carry voting rights in corporate decisions and are entitled to receive dividends. There are various types of stocks (also called shares or equity), but the most typical are "common" or "preferred."

 Some mavens recommend investors purchase preferred shares these days because they are legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders. The banks that were bailed out by the Federal Reserve issued preferred shares for this purpose.

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 Bonds are a form of borrowing by the company, which promises to pay the money back on a future maturity date and pay interest in the meantime. There are different kinds of corporate bonds. Some are secured by specific assets. Others that aren't secured are called debentures. They are merely a promise to pay back the loan.

 Corporate bonds sometimes allow the conversion of the bonds into the company's stock. Or the company might have the right to buy back the bonds before they mature.

 The considerations above are those of a company seeking to grow. The considerations of an investor seeking security or profit are completely different.

 Daphna Levit was an international equity analyst at Merrill Lynch in Tokyo, vice-president at Morgan Stanley in London and senior vice-president at Barings Securities in New York.

 When she retired from the active markets, she went on to teach finance and economics to MBA students. She now lives near Lunenburg.

posted on 01/13/09