Chapter 8 Terms  Sole proprietorship- a business owned by a single individual  Partnership- a business owned by two or more people  Corporation – a business owned by stockholders (private and publically held)  Business Franchise- A semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area  Liability- legal obligations to pay debts  General Partnership- partners share equally in both responsibility and liability  Limited Partnership- only one partner is required to be a general partner, or to have unlimited personal liability for the firm  Limited Liability Partnership- all partners are limited partners

Advantages and Disadvantages of Sole Proprietorships Easy to start and stop Few regulations Full Control and all the profits Advantages Disadvantages Limited access to resources (physical and human capital) Unlimited personal liability Lack of permanence

Advantages of Partnerships Easy Start-Up Shared Decision Making Larger Pool of Capital

Disadvantages of Partnerships  At least one partner has unlimited liability.  Bound by each other’s actions.  Potential for conflict.

Advantages and Disadvantages of Incorporation Advantages for the Corporation  Potential for growth  Ability to borrow money by selling bonds.  Access to the best labor Disadvantages for the Corporation  Difficult and expensive to start  Loss of Control  More Regulation

Advantages and Disadvantages of Business Franchises Advantages of Business Franchises Management training and support Standardized quality National advertising programs Disadvantages of Business Franchises High franchising fees and royalties Strict operating standards and purchasing restrictions Limited Freedom

Topic Overview Investing Financial System Investment Choices Savings Accounts CD’s Mutual Funds Bonds Stocks

What is investment ? The act of redirecting resources from being consumed today so that they will create benefits in the future. Translation: Putting money aside today so that you can have more money in the future!

Private Enterprise and Investing  When people save or invest their money, their funds become available for businesses to use to expand and grow. In this way, investment promotes economic growth for the entire economy. For investment to take place an economy needs a healthy financial system. The financial system includes savers and borrowers and allows for the transfer of money between them.

What are financial intermediaries? Financial intermediaries are institutions that help channel funds from savers to borrowers. What are some examples of financial intermediaries? 1.Banks and Credit Unions 2.Finance Companies 3.Life Insurance Companies 4.Mutual Funds 5.Pension Funds

Savers make deposits to… Commercial banks Savings & loan associations Savings banks Mutual savings banks Credit unions Financial Institutions that make loans to… Life insurance companies Mutual funds Pension funds Finance companies Investors

What are the Three Main Functions of Financial Intermediaries? 1. Sharing Risk 2. Providing Information 3. Providing Liquidity

 Return and Liquidity Savings accounts have greater liquidity, but in general have a lower rate of return. Certificates of deposit usually have a greater return but liquidity is reduced.  Return and Risk In general, the higher potential return of the investment, the greater the risk involved. 13

Saving and Investing Options Compare and Contrast OptionSavings Accounts CD’sBondsStocks AdvantagesFDIC insured Liquid FDIC insuredRelatively safe Moderate interest Potential for large capital gains Liquid DisadvantagesLow interestNot liquid High risk

Saving and Investing 1. Savings Accounts Savings Savings ○ A bank account used for depositing money that may be needed in a short amount of time. ○ Highly Liquid/Low Interest Money Market Money Market ○ Bank account that allows you to save and write a limited number of checks. ○ Higher interest (VARIABLE) than a savings account, but generally requires a minimum balance and has increased fees. ○ Liquid/Variable interest Time Deposit (Certificate of Deposit) Time Deposit (Certificate of Deposit) ○ Bank accounts that offer a guaranteed interest rate for a fixed amount of time. ○ Banks charge substantial penalty for withdrawing before the CD has reached maturity ○ Low Liquidity/Higher interest

2. Bonds  Loans or IOU’s from the government or corporation that must be repaid to the investor.  Characteristics: coupon rate (interest rate), maturity (time until payment is due), par value (face value/principal)  Types: Savings, Treasury, Municipal, Corporate, Junk  Lack liquidity, moderate return, generally low risk

3. STOCKS  Represent a piece of ownership in a corporation  Potential Benefits: Capital Gains and/or Dividends  Types of Stock: Preferred (dividends) and Common (dividends based on the market)  Highly liquid, moderate to high risk

4. MUTUAL FUNDS  Fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds and other financial assets.  Naturally diverse investment option, which reduced risk  Liquidity and risk vary by type

The Stock Market  Corporations can raise money by issuing stock which represents ownership in the corporation.  A portion of stock is called a SHARE.  By selling shares of stock, corporations raise money to start, expand and develop their businesses.  In this way, stocks encourage overall economic growth.  Corporations can raise money by issuing stock which represents ownership in the corporation.  A portion of stock is called a SHARE.  By selling shares of stock, corporations raise money to start, expand and develop their businesses.  In this way, stocks encourage overall economic growth. Stock Market Basics

How Stocks Are Traded  A stockbroker is a person who links buyers and sellers of stock.  Stockbrokers work for brokerage firms, or businesses that specialize in trading stock.  Stock exchanges are markets for buying and selling stock.

How do investors profit from stocks?

What are four main types of stock? Dividend Difference Growth Stock Pays few or no dividends. Income Stock Pays regular dividends. Decision Making Difference Common Stock Voting member, last payout Preferred Stock Non-voting member, first payout

Measuring Stock Performance Bull and Bear Markets  When the stock market rises steadily over time, a bull market exists.  When the stock market falls over a period of time, it’s called a bear market. Stock Performance Indexes The Dow Jones Industrial Average  The Dow is an index that shows how stocks of 30 companies in various industries have changed in value. The S & P 500  The S & P 500 is an index that tracks the performance of 500 different stocks.

$87 Billion The Crash of 1929  Between the years of 1925 and 1929 the value of stocks being sold on the New York Stock Exchange had more than tripled. $27 Billion GM rose from $268 to $452 per share!!

Causes of the Crash  Dangerous investment practices Speculation Buying on the Margin  False sense of prosperity The “Roaring Twenties” brought unprecedented amounts of prosperity to the United States. During this period consumers had access to many new products and believed that they could all have the glitz and glamour of the era. Many spent well beyond their means and then utilized the largely unrestricted credit available to keep on purchasing.  Government policies “Laissez Faire” Lack of business regulation Lack of bank regulation Lack of stock market regulation

The Beginning of the End: Black Thursday  Despite signs in September that a stock market crash may occur, many people continued to invest in the market.  By late October it became clear that the market was getting increasingly dangerous. Professional investors began to pull out of the market which resulted in a decline in prices.  On October 24, 1929 almost 13 MILLION shares of stock were frantically traded.  As stock values plummeted below the amount borrowed to purchase them, brokers demanded that investors repay their loans. When they couldn ’ t, brokers offered the stocks for sale.

The Bottom Falls Out: Black Tuesday  On October 29, 1929 the stock market collapsed.  Over 16 MILLION shares of stock were sold on that day and by the end of the day many stocks had no value at all!  Investors lost over $30 BILLION which was equivalent to: 1/3 of the United States gross domestic product Wages of ALL Americans for that entire year!  The failure of the banks was one of the most devastating results of the stock market crash because it resulted in non-investors losing their savings October 29, 1929

Effects of the Great Crash 1. The Great Depression 2. Mistrust of banking industry/stock market 3. Long-term reduction of investment