Study Guide: Business Ownership & Financing

What are the key characteristics of a successful entrepreneur?

Risk-tolerant, hardworking/vigorous, growth mindset.

What are the potential rewards of starting your own business?

Own boss, potential for high income, creative freedom, own schedule.

What are the risks and drawbacks to consider before taking the entrepreneurial leap?

All responsibility on you, potential for low income, instability, imbalance between work/life.

How is a sole proprietorship structured?

One owner.

What are the advantages and disadvantages of a sole proprietorship?

Pros: All profits, easy to set up, end quickly. Cons: All responsibility, difficult to raise capital.

Why is a sole proprietorship the most common form of business ownership?

Because it's the easiest to set up and requires the least amount of paperwork.

What are the different types of partnerships?

General, limited.

How does a partnership agreement protect the business and its owners?

It outlines the responsibilities and contributions of each partner, as well as how profits and losses will be shared.

What are the potential conflicts that can arise in a partnership?

Disagreements over business decisions, unequal contributions, or personal disputes.

What are the key features of a corporation, including limited liability?

Separate legal entity, limited liability for shareholders, ability to raise capital more easily.

How does a corporation's structure differ from a sole proprietorship or partnership?

It's more complex, with a board of directors, shareholders, and officers.

What are the legal and financial implications of incorporating a business?

It can be more expensive to set up and maintain, but it offers greater protection for owners.

What are the benefits and drawbacks of buying a franchise?

Pros: Business ready, benefits (brand recognition, training, support). Cons: Regulation from franchisor, large sum/royalties.

How does the franchise agreement define the relationship between the franchisor and franchisee?

It outlines the rights and obligations of both parties, including fees, operating procedures, and marketing.

What factors should be considered when evaluating a franchise opportunity?

Franchise fees, ongoing royalties, training and support provided, brand reputation, market potential.

Why is there "no best type" of ownership?

The best type of ownership depends on the specific business, the entrepreneur's goals, and the level of risk they're willing to take.

What are mergers and acquisitions (M&A), and why do they occur?

Combining companies for various reasons (growth, market share, synergy, diversification).

How do antitrust laws promote competition in the marketplace?

They prevent monopolies and ensure that businesses compete fairly.

What is the fundamental difference between financing through bonds and financing through stock?

Bonds are loans (debt) while stocks represent ownership (equity).

How does each method impact the ownership and control of the company?

Bonds do not dilute ownership, while stocks give shareholders voting rights and a share of the company's profits.

What are the main categories of bonds based on their maturity dates?

1-year bill, 2-10 year note, 10-30 year bond.

How do interest rates and maturity dates affect the value of a bond?

Generally, higher interest rates and longer maturity dates increase a bond's value.

Why do corporations and governments issue bonds?

To raise capital for various purposes (expansion, infrastructure projects, etc.).

How do investors assess the risk of investing in different types of bonds?

By considering the bond issuer's creditworthiness, the bond's rating, and economic conditions.

How do bonds generate income for investors?

Through regular interest payments.

What is the significance of a bond's rating, and how is it determined?

A bond's rating reflects its credit risk; higher ratings indicate lower risk. Rating agencies like Moody's and S&P assess the issuer's financial health.

How do market indices like the Dow Jones and S&P 500 reflect the performance of bonds and stocks?

They track the performance of a select group of stocks, providing a benchmark for overall market performance.

What distinguishes private companies from public companies?

Private companies are not traded on stock exchanges; public companies are.

What is an IPO (Initial Public Offering), and why do companies go public?

It's the first sale of stock to the public; companies go public to raise capital and increase their visibility.

What role does the SEC (Securities & Exchange Commission) play in the stock market?

It regulates the stock market to protect investors and ensure fair trading practices.

How does a company's Board of Directors influence its operations and financial decisions?

They oversee the company's management, set strategic goals, and approve major decisions.

What are the two primary ways investors can profit from stocks?

Capital gains (buy low, sell high) and dividends.

How do dividends provide income to shareholders?

They are a portion of the company's profits distributed to shareholders.

Why might a company choose to reinvest its profits instead of paying dividends?

To fund growth opportunities or improve its financial position.

What are the main functions of stock exchanges like the NYSE and NASDAQ?

To provide a platform for buying and selling stocks and to facilitate capital formation.

How has technology transformed the way stocks are traded?

It has made trading faster, more accessible, and less expensive.

What do the terms "bullish" and "bearish" signify in the stock market?

Bullish = optimistic (prices rising); Bearish = pessimistic (prices falling).

How do these market sentiments influence investor behavior?

They can affect investors' decisions to buy, sell, or hold stocks.

What are the characteristics of different stock categories, from penny stocks to income stocks?

Penny: Low-priced, high risk. Growth: High growth potential. Blue Chip: Large, established companies. Income: Pay regular dividends.

How can investors diversify their portfolios by investing in various types of stocks?

By spreading their investments across different sectors and stock categories, they can reduce risk.