unit 2 general (ECON)

3 categories of the business structure

• sole proprietorship

• partnership

• corporation

proprietorship

• business w/ one owner

• the simplest business category

partnership

generally has 2 or more partners that reach an agreement as to their responsibilities and ownership percentage

corporation

• creates a separate legal entity (their corporation)

• issue share certificates (stock) to show who owns how many shares of the corporation

• usually starts off small w/ just a few shareholders

  • as corporations grow, they often find they need to raise more money + get a lot more investors

stock

• defined as a share of ownership of a company

  • investors own a % of the company + its profits

what owning stock can get for you

• what you are entitled to depends on the amount of stock you own

  • often get to vote to choose Board of Directors

  • pick independent accountants

  • approve any major change in the company (ex: merging w/ another company)

• if you decide you no longer want to own one of your shares, you can sell your shares on one of the stock exchanges

types of stock (2)

• common stock

• preferred stock

common stock

• the kind most investors buy

• generally gives one vote at shareholder meetings for every share owned

• holders may also be entitled to receive periodic dividend payments (distributions of the companies provides)

  • companies still growing usually pay little to no dividends

  • well established companies (like utilities) generally pay higher dividends)

dividend payments

• distributions of the companies provides usually given to common stock holders

• (for larger stable companies) a portion of corporate profits is usually paid back to shareholders 4 times a year as a dividend

  • companies still growing usually pay little to no dividends

  • well established companies (like utilities) generally pay higher dividends)

preferred stock

• generally does not have voting rights

• generally will not find them trading on an exchange

• if a company decides to pay dividends, preferred stockholders may get

  • a bigger share than common stockholders

  • get paid before common stockholders

• preferred stockholders are entitled to be paid first if a company goes bankrupt + all the assets are sold off

stock vs bonds

• own stock: owning part of the company itself

  • buying a piece of ownership of a company

• own bond: lending a company money

  • a loan to the company + they become indebted to you

  • a promise that a company makes to pay you back the amount you lent them plus interest

2 places where new stock in a company can come from

• new issues

• stock dividends (or splits)

IPO Growth: New Issues (Initial Public Offering)

• when a private company decides to “Go Public”

  • issues shares of stock to anyone to buy

  • primarily to raise money

  • huge fluctuations in the stock’s price in the first weeks while the market decides on a fair price for the shares

    • original owners allow public to vote on management decisions in exchange for the cash raised in the stock sale to re-invest + help the company grow

stock dividends (splits)

• when companies may also issue new shares of stock after IPO

• giving all current shareholders additional shares in proportion to how much they currently have

  • ex: for every 10 shares you own now, they will issue you one extra share (same ‘value’)

• companies want to attract attention, increase trading, + lower the price

• if stock dividend is large (~20%), it is called a Stock Split

2 reasons why companies want to issue stock dividends or splits

• attract attention + increase trading

  • attract attention to the company through hype

  • more shares in circulation may encourage people to buy + sell more

• lower the price

  • large companies like to have their stock price stay in a certain range

  • more affordable + increases the total value of all stocks in the long run

liquidity

how easily $ can be converted into cash for other use

risk

the chance of the investment to use value

potential returns

how fast your investment can grow

all investments balance ___ (3)

• liquidity

• risk

• potential returns

security type

what you are holding as an investment

cash and bank deposits

• security type

• liquidity: very high

• risk: low

• potential growth: zero or negative

certificates of deposit (CD)

• security type

  • like a savings account w/ a locked-in interest rate

  • cannot withdraw the cash for a certain period of time

• liquidity: low

• risk: low

• potential growth: low

stocks

• security type

  • buying a piece of one or many companies in exchange for a share of their profits

    • mutual funds + EFTs which hold stocks are the same thing

• liquidity: high

• risk: medium

• potential growth: high

bonds

• security type

  • a loan that you make to a company / gov, and they need to pay it back plus interest (makes YOU a creditor)

• liquidity: medium

• risk: low

• potential growth: medium

real estate

• security type

  • land + buildings

    • people would buy a house and hope the value grew over the next 30-40 years to sell it and use profits for retirement

    • or house flip (buying damaged or discounted houses, do repairs, + sell for profit)

• liquidity: low

• risk: medium

• potential growth: medium

precious metals

• security type

  • ex: buying gold + silver

• liquidity: high

• risk: medium

• potential growth: medium

derivatives

• security type

  • derives its value from something else

  • types of derivatives include stock options and futures

    • stock option: has value because the stock that it lets you buy has value (but the contract itself is useless unless you use it)

    • futures: good for commodities (like oil) delivered at a future date

  • most useful for hedging

    • buying a stock option for a stock you think will go up in value, but you don’t want to necessarily buy right now

• liquidity: medium

• risk: high

• potential growth: high

diversified portfolio

• always keep a diversified portfolio

• splitting assets between a few different security types

  • 50% savings —> real estate

  • 50% savings —> stocks + bonds

• however! as you get closer to retirement, your portfolio should get more conservative

  • if you have lots of stock that lose value when you’re 25, you still have 40 years of income to make up for it

  • if you have lots of stocks that lose value when you’re 62, it becomes a lot more difficult to make up that income

3 common investing strategies

• “Buy and Hold” strategy

• value investing

• active trading

“Buy and Hold” strategy + downside

• you do extensive research on what you’re buying, choosing investments for solid long-term reasoning, then buy it + hold onto it, regardless of what it’s market price does

• downside

  • a deadline still exists of when you need that money to live on in retirement

  • might take a huge loss before admitting defeat

value investing

• looking for stocks that are under-valued compared to the rest of the market

  • when picks start looking “priced in” or “over-valued”, you’ll start thinking about selling + moving on

• downside

  • requires close attention to companies

  • re-evaluate how much you think they’re worth regularly

  • if wrong multiple times in a row, you could have trouble “bouncing back”

active trading

• when you are buying and selling stock regularly

  • different from Day Trading — when you buy or sell on the same day

• requires more advanced knowledge of chart patterns, fundamental and technical analysis, and risk

• in exchange, you can make huge returns w/ active trading by riding market trends

• downside

  • potential for big losses

  • suggestions for only using a very small portion of your portfolio for active trading, since damage can be hard to undo

economics

• the study of how people seek to satisfy their needs + wants by making choices

• all resources are scarce + every decision involves a trade-off

the core of economics is about __

solving the problem of scarcity

economics is__

the study of scarcity and choices

specialization

a division of labor and people focusing on what they do best

Adam Smith says __ makes people better off

life got significantly better for people after the __

Industrial Revolution

PPF (Production Possibilities Frontier)

• a graph showing the different combinations of 2 goods being produced using all resources efficiently

• shows how many of 2 items a country can make if it uses all of its resources efficiently

  • every possible combination inside the curve is inefficient

  • every possible combination on the curve is efficient

  • every possible combination outside the curve is impossible

3 intolerable issues associated w/ international trade

• child labor

• dangerous working conditions

• pollution

sountries who open themselves to trade are better off economically than those who are closed to trade — T or F

true

factors of production

the inputs needed for creating a good or service

• land

• labor

• capital

• entrepreneurship

3 economic questions

• what goods and services should be produced?

• how should these goods + services be produced?

• who gets to consume these goods + services + how?

5 pillars of free enterprise system

• private enterprise

• profit motive

• competition

• private property

• customer sovereignty

invisible hand

the unintended social benefits resulting from individual actions

• society progresses when producers + consumers act in their own self interest

• self-interest + competition working together to regulate marketplace w/out gov

circular flow model

represents the circulation of goods, services, resources between producers + consumers

economic goals for a strong economy

• economic efficiency

• economic freedom

• economic equity

• economic security + predictability

• economic growth + innovation

4 types of economies

• traditional economy

• market economy

• command economy

• mixed economy

policy makers 3 economic goals

• keep economy growing overtime

• limit unemployment

• keep prices stable

3 specific measurements economists analyze to see if a country is achieving each goal

• GDP

• unemployment rate

• inflation rate

nominal GDP

GDP not adjusted for inflation

real GDP

GDP adjusted for inflation

• used by economists more — more accurate

recession

when 2 successive quarters (6 months) show a decrease in real GDP

depression

a severe recession

to be unemployed, one must be __

looking for a job

discouraged workers

unemployed people that were looking for work but have given up

frictional unemployment

the time period between jobs when a worker is searching for, or transitioning from one job to another

structural employment

unemployment caused by a lack of demand for a worker’s specific type of labor

cynical unemployment

unemployment due to a recession

3 types of unemployment

• frictional unemployment

• structural unemployment

• cynical unemployment

natural rate of unemployment

the lowest rate of unemployment that an economy can sustain over a long preriod

contraction

economy going to slow

4 components that make up GDP

• consumer spending

• business

• government

• net exports

GDP per capita

• GDP of the country divided by its population

• represents output per person

• country w/ high GDP per capita is considered rich

• use GDP per capita to measure a country’s standard of living

productivity

a country’s ability to produce more output per worker, per hour

• one reason that US workers make more $ that other nations is because of productivity

3 negatives to high lvls of production

• income inequality

• environmental impacts

• strain on resources

technology

the sum total of knowledge + info that society has acquired concerning the use of resources to produce goods + services

externality

a byproduct of a market transaction

gov regulates monopolies through __

Anti Trust laws

5 basic principles of free enterprise

• economic freedom

• voluntary exchange

• private property

• profit motive

• competition

3 ways to track the economy

• GDP

• productivity

• standard of living

goal is to provide jobs to everyone able (__% unemployment is desireable)

4-6%

establishing weights + measures is so important to the economy since it __

clearly defines how much of something is being sold or purchased