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 Disadvantagesof Sole ProprietorshipsEasy to start and stop

Few regulationsFull Control and all the profits

Advantages DisadvantagesLimited access to resources

(physical and human capital)

Unlimited personal liabilityLack 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 FranchisesAdvantages 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

InvestingFinancial System

Investment Choices

Savings AccountsCD’s

Mutual FundsBondsStocks

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 Unions2. Finance Companies3. Life Insurance Companies4. Mutual Funds5. Pension Funds

Savers make deposits to…

Commercial banksSavings & loan associations

Savings banksMutual savings banks

Credit unions

Financial Institutions that make loans to…

Life insurance companiesMutual funds

Pension fundsFinance companies

Investors

What are the Three Main Functions of Financial Intermediaries?

1.Sharing Risk2.Providing Information

3.Providing Liquidity

Things to Consider….

Return and LiquiditySavings 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.

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Saving and Investing Options Compare and ContrastOption Savings

AccountsCD’s Bonds Stocks

Advantages FDIC insuredLiquid

FDIC insured Relatively safeModerate interest

Potential for large capital gainsLiquid

Disadvantages Low interest Not liquid Not liquid High risk

Saving and Investing1. Savings Accounts

Savings○ A bank account used for depositing money that may be

needed in a short amount of time.○ Highly Liquid/Low Interest

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) ○ 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.

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.

DIVIDENDS ~PORTIONS OF A CORPORATION’S PROFITS THAT

ARE PAID OUT TO STOCKHOLDERS.

~GENERALLY, THE HIGHER THE CORPORATE PROFIT, THE HIGHER THE DIVIDEND.

CAPITAL GAINS~MONEY EARNED WHEN A STOCKHOLDER SELLS

STOCK FOR MORE THAN THEY PAID FOR IT.

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

DifferenceCommon 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 IndexesThe 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

1925 1929

GM rose from $268 to $452 per share!!

Causes of the Crash Dangerous investment practices

SpeculationBuying on the Margin

False sense of prosperityThe “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 regulationLack 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 productWages 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 Depression2. Mistrust of banking

industry/stock market3. Long-term reduction of

investment