Understanding corporate finance: raising finance: companies as investors
Companies as investors
Companies may be lenders as well as borrowers. As well as needing to borrow money to finance investment and cover day to day cash flow needs, a company may have surplus funds to invest. Cash deposited at the bank will normally earn interest at floating rates based on daily bank deposit rates.
For larger sums, many banks offer short-term money-market deposit terms at an agreed rate of interest. The terms of such products usually allow money to be deposited for varying periods of between overnight and three months, depending on the company’s immediate cash requirements. Longer term deposits may be made with limited rights to withdraw the principal.
Alternative forms of short-term investments include certificates of deposit (a type of promissory note issued by banks), and commercial paper issued by other companies.
Companies may also hold longer term investments such as the corporate bonds issued by other companies, as well as equities and government securities. Financial institutions such as banks, building societies and insurers may be required to hold certain types of financial instrument as assets to back up their trading activities.
See also CFM13000 on other types of financial product such as derivative products, used by companies for investment, trading and speculation.