Business Finance (Stocks and Bonds)

 Meet their every day expenses including: payroll, rent, utilities, etc  Replace and expand their inventory  Expand and grow through purchasing more space or equipment  Meet the interest/ pay off debts

 Short-Term Financing refers to  Less than a year Trade Credit Bank Loans (Short term) Retained Earnings  Long-Term Financing refers to  One year or more Long Term Loans Bonds Stocks

 Trade Credit  Most common type of short term financing  Many times it can be very informal (handshake or verbal ‘ok’)  Business suppliers give customers 30 to 60 days to pay for their orders

 Banks generally will allow anyone to borrow from a line a credit with a document signed and sealed which has the following items:  Promissory Note- the written promise to repay a loan plus interest at a specified date  A line of credit- a loan arrangement in which a bank allows a business to borrow any sum, up to a specified limit  Terms of repayment- how this loan will be repaid

 Retained Earnings  These are profits that are not distributed to the owners of a business  For a stock this means NO DIVIDENDS, which could hurt a stock price significantly  Another term for retained earnings is “undistributed profits”

 Corporations have three long-term financing sources available to them:  Long-term loans  Bonds  Stocks

 Long-term loans refer to loans that are a year or more  They are usually used for  The purchase of new machinery  The purchase of new real estate  Collateral has to be put up for these loans  Collateral is any item of value that the lender may seize should the borrower fail to make loan payments as promised. That’s the plot for our awful movie!!!

 As opposed to sole proprietorships and partnerships, corporations have the ability to sell stocks and bonds  Stocks represent ownership in a company  Bonds are certificates issued in exchange for a loan.

 Thus stockholders are part owners of a business  Bondholders are among the creditors (financiers) of a business  BOTH are known collectively as SECURITIES

 A bond is a kind of a long-term “IOU”/ Loan To investors who buy these bonds  It is a promise by a corporation, OR GOVERNMENT to repay:  a specified sum (the face value of the loan)…  … at the end of a specific number of years (term)  … along with annual interest  The total of the actual money loaned is called the principal

 Since bonds are debt of a corporation, bondholders are among its creditors  If a company goes bankrupt (unable to pay off its debts), it will pay off its bondholders first and other creditors after  If there is ANY money left, and most likely there won’t be, stockholders are paid

 Many people consider bonds to be more secure then stocks…  This may be generally true but any security is only as good as the company/ government that issues it

 Most people are just familiar with “Class EE” savings bonds…

 This savings bond has an initial cost of $50, and will be worth $100 after a number of yearssavings bond  Like corporate bonds, government bonds are evidences of debt.  When we purchase this bond, we are lending the government money  In exchange for this money, the government is promising to repay the loan, plus interest on the bond

 All levels of government- local, state, and federal- sell bonds from time to time  All bonds are issued in exchange for a loan and thus represent a promise to repay the loan with interest  The reasons for government bonds range from just a standard raising of funds to specific projects. Some include…

 Equity Financing refers to the sale by a corporation of shares of its stock as a means of raising capital  Even though it seems huge, this only accounts for only 4% of the funds raised by corporations  wX4fm7yaFWlLNybvZx4?fr=yfp-t-701- s&toggle=1&cop=mss&ei=UTF8&p=facebook%20ip o wX4fm7yaFWlLNybvZx4?fr=yfp-t-701- s&toggle=1&cop=mss&ei=UTF8&p=facebook%20ip o

 Again, a stock is a certificate that represents ownership in a corporation  People can purchase these stocks in a Stock Exchange or Stock Market  Stock Exchanges/ Stock Markets are places where shares of the nation’s major corporations are bought and sold

 There are two type of stock:  Common Stocks entitle their owners to vote in Board of Directors elections.  These stocks can get a dividend, but not always  All corporations issue these stocks

 Preferred Stocks have NO VOTING RIGHTS  …but are entitled to a fixed dividend which is paid before Common Stock holders  And it is a dividend GUARANTEED to be paid.

Advantages of Bonds If a company goes bankrupt, Bonds are still paid off Less risky of the two securities Corporations AND GOVERNMENTS can create Bonds Advantages of Stocks Higher possible rate of return Can be bought or sold at anytime Can be purchased easily online Disadvantages of Bonds Takes years to get the guaranteed money Lower rate of return Government bonds are harder to come by Disadvantages of Stocks More risky of an investment than a bond Can lose EVERYTHING invested in them Only used by corporations, NOT governments

 New York Stock Exchange  NYSE  American Stock Exchange  AMEX  National Association of Securities of Dealers Automated Quotation System  NASDAQ

 The oldest of the major stock exchanges in this country.  Formed in 1792 to pay for Revolutionary War debt.  This a traditional stock market, where there is an actual trading floor  brokers selling to one another  where physical trades can be made.

 Shortly after the NYSE was formed, brokers began meeting outside of the NYSE, literally on the curb and began to trade business and government securities on behalf of their clients

 This market became known as the “Curb Exchange” which moved to its own 14 story building in Lower Manhattan  In 1953, this building became known as the American Stock Exchange (AMEX)

 On December 1, 2008, the Curb Exchange building at 86 Trinity Place was closed, and the Amex Equities trading floor was moved to the NYSE Trading floor at 11 Wall Street86 Trinity Place

 Formed in 1971  This market is not a traditional stock market  It is a securities market that is operated through a computer network  They do not have a main building nor an actual trading floor.

 Try to guess where the following stocks are traded:  IBM IBM  Macy’s Macy’s  Proctor and Gamble Proctor and Gamble  Google Google  FREE SHOTS… Who would you like to know?

 Major Reason #1  Investors would not be willing to buy stocks or bonds if there were no easy way to sell them at a later date Corporations would find it extremely costly to find investors interested in buying their securities  Major Reason #2  The stock markets enable us to know the value of stocks This information is invaluable to investors who own or are thinking of buying stocks