With the end of a stock rally in May, uncertainties over the recapitalization of several financial companies on Wall Street have reverberated around global stock markets and caused tremendous upheavals.
Most of the financial firms need to inject capital urgently to shore up balance sheets (hit badly by massive write-offs), else a run of investors’ confidence could send them into receivership.
Capitalization can come from several sources, some from equity (preferred stocks, common stocks) and some from debt (bonds, long-term notes).
To protect our investments, one of the key lessons is to track capitalization ratios or rather the mix of capitalization so that we can spot emerging trends and possible trouble spots.
You have to understand that the relationship between equity and debt changes over time. I will discuss more about the implications of bonds on stockholders in future posts.