Unit 3 Econ

Sole Proprietorship

Business owned and run by a single person who has rights to all profits and unlimited liability for all debts, most common form of business in the United States.

Sole Proprietorship Advantages

Easy to start, ease of management, owner keeps all the profits, no business tax (just income), get to be your own boss, easy to get out of the business (if profitable).

Sole Proprietorship Disadvantages

unlimited liability (personally and fully responsible for al losses and debts), difficulty raising financial capital, limited experience, tough to compete with bigger businesses.

Partnership

Business owned and operated by two or more people who share the profits and have unlimited liability.

General Partnership

Form of partnership where all partners are jointly responsible for management and debts.

Limited Partnership

One or more of the partners are not active in running the business and whose liability for debt is restricted to the amount invested in the business.

Advantages of Partnership

Ease of management, can share duties, easier to get loans, share risk with partner

Disadvantages of Partnership

Don't have full control, potential conflict between partners

Corporation

Business recognized by law as a separate legal entity with all the rights and responsibilities as individuals (property, legal contracts, lawsuits)

Charter

Written government approval to establish a corporation.

Stock

A certificate of ownership in a corporation, can be either common or preferred stock.

Stockholder/Shareholder

People who own a share(s) of stock in a corporation.

Common Stock

Most basic form of ownership, generally with one vote per share.

Preferred Stock

Form of stock with no voting privileges; higher claim on corporate income and assets than common stock.

CEO and the Company Board

Who controls corporations?

Shareholder's Rights

To ask questions and see data, vote on proposals, vote on the CEO and board members, right to share of assets in case of liquidation.

Advantages of Corporations

Ease of raising money (bonds and selling shares), less risk (limited liability- Corporations, not its owners are responsible for all losses and debts), can borrow money by issuing bonds (contract to repay borrowed money and interests on the borrowed money at regular future intervals), can hire experienced professionals

Principal

Amount borrowed when getting a loan or issuing a bond.

Interest

Payment made for the use of borrowed money; usually paid at periodic intervals for long-term bonds or loans.

Dividend

Money paid to stockholders, usually quarterly, representing portion of profits.

Compound Interest

Interest you earn on interest.

Disadvantages of Corporations

Harder and more expensive to get started, double taxes (a disadvantage of a corporate form of organization in that the corporation must pay a tax on the money earned and the shareholder pays a second tax on the dividends distributed), the owners (shareholders) have little power in how the business is run day to day, subject to more government regulations.

Income Statement

A report showing a firm's sales, expenses, net income, and cash flows for a certain period, usually three months or a year.

Net Income

Measure of business profits determined by subtracting all expenses, including taxes, from revenues.

Depreciation

A noncash charge the firm takes for the general wear and tear on its capital goods.

Cash Flow

Company's "bottom line". Broadest measure of profits because it includes both net income and non cash charges.

Merger

A combo of two or more businesses to form a single firm.

Horizontal Merger

Combination of firms producing the same kind of product.

Vertical Merger

Combination of firms involved in different steps of manufacturing, marketing or sales.

Reasons for Merging

Faster growth, economies of scale, diversification, elimination of rivals

Conglomerate

A firm with four or more businesses making unrelated products, with no single business responsible for a majority of its sales.

Multinationals

Corporation whose business activities are located in several countries.

Start-Up Incubators

Places where entrepreneurs can receive the training and other assistance needed to build a successful company.

Venture Capitalist

Investors to a start-up business in exchange for partial ownership of the business.

Angel Investors

informal and usually affluent investors who provide funds to less-promising start-ups.

Crowdfunding

raising money for a project or venture by obtaining many small amounts of money from many people

Nonprofit Organization

Institution that operates like a business but does not seek financial gain such as schools, churches, or community service organizations

Characteristics of Nonprofits

Limited liability, no taxes, all money is put back into the organization to continue operations and no keeping profits

Mission Statement

A formal summary of the aims and values of a company, organization, or individual

Cooperative

A co-op, nonprofit association performing some kind of economic activity for the benefit of its members.

Credit Union

nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services

Difference between Banks and Credit Unions

Credit Unions have Nonprofit, membership, limited offerings, lower fees and better interest rebates (usually)

Labor Unions

Organization that works for its members interests concerning pay, working conditions, hours, benefits, etc.

Collective Bargaining

Process of negotiation between a union and management reps over pay, benefits, etc.

Chamber of Commerce

Nonprofit organization of local businesses whose purpose is to promote their interests

Better Business Bureau (BBB)

Business-sponsored nonprofit organization providing information on local companies to consumers

Federal Reserve System

privately owned, publicly controlled, central bank of the United States

Fiat Money

money by government decree; has no alternative value or use as a commodity

Specie

Hard currency, in the form of gold or silver

Medium of Exchange

money or other substance generally accepted in exchange; one of the three functions of money

Measure of Value

allows money to serve as a common denominator to measure value; one of the three functions of money

Store of Value

Allows people to preserve value for future use

Demand Deposit Accounts

Account whose funds can be removed from a bank by writing a check or using a debit card

M1

Narrow definition of money as a medium of exchange, includes coins, currency, checks, etc

M2

Broad definition of money that includes M1 plus savings deposits, time deposits, and money market funds

What is the Federal Reserve?

Central Bank of the US

What does the Federal Reserve do?

Monitors financial system risks at home and abroad, ensures a healthy economy, controls money

How does the Federal Reserve Work?

Controls interest rates, money supply (distribution, lending, printing, and processes electronic payments)

Who runs the Federal Reserve?

Board of Governors who are nominated by the president and confirmed by the senate

Gold Certificates

Paper currency backed by gold, issued in 1863 and popular until recalled in 1934

Silver Certificates

Paper currency backed by and redeemable for silver from 1878 to 1968

Gold Standard

A system in which the basic unit of currency is equal to, and can be exchanged for a specific amount of gold

State Chartered Bank

Bank that receives its charter from the state in which it operates

Credit Card

Borrowing funds from a bank to make purchases

Debit Card

Tied to your personal checking account to make purchases

Pros of Credit Cards

Can improve your credit score, and you can earn rewards for using them. A credit score is- a measure of an individual's credit risk; calculated from a credit report using a standardized formula, speed at which you will pay a loan back.

Cons of Credit Cards

Have to pay interest if you dont pay on time, can hurt your credit score

Pros of Debit Cards

Can't hurt your credit score, overspending is less likely

Cons of Debit Cards

No rewards/perks

Certificates of Deposit

Receipt showing that an investor has made an interest-bearing loan to a financial institution

Money Market Accounts

Similar to a savings account, but with checking account feature, requires larger minimum deposit and balance

Checking Account

Amount which allows for the ease deposits and withdrawals, low to zero interest rate, most people use this type of account for direct deposit and paying bills

Overdraft Fee

Fine charged by the bank for withdrawing more money from your account than what you have in it

Reserve Requirement

Must keep 20% in the bank, formula used to compute the amount of a depository institution's required reserves.

Bond

Formal contract to repay borrowed money and interest on the borrowed money at regular future intervals

Bonds vs. Stocks

_________- Less risk but lower return, investor loans the company money, first to be repaid if company goes bankrupt, does not share in profits (no dividends) vs ____________- investor becomes a part owner, last to be repaid if bankruptcy, shares in benefits (dividends)

Components of Bonds

Par value- principal of a bond or total amount borrowed, Maturity- life of a bond or length of time funds are borrowed, Coupon Rate- stated interest on a corporate, municipal, or government bond

Current Yields

Bond's annual coupon interest divided by purchase price; measure of a bond's return

Junk Bonds

Corporate bonds, risky, carry a high rate of return as compensation for the higher possibility of non-payment

Municipal Bonds

Bonds issued by state and local governments known as munis

Savings Bonds

Low denomination (Max 10k), non transferable bond issued by the fed govt

Treasury Notes

US government bond with maturity of 2-10 years

Treasury Bonds

Issued by the US government with a maturity of 30 years

Individual Retirement Accounts

Retirement account in the form of a long-term deposit, not taxed until withdrawn during retirement

Origins of Stock Market

Started because of Dutch East India Company, charter companies, private investments in businesses, eventually many businesses went public, creating a market

IPO

Initial public offering, first time retail investors have a chance to buy stock in a company

Equities

Stocks that represent ownership in corporations

Retail Traders

Individuals investing on their own for themselves. Invest small amounts, cant influence the market on their own

Stockbroker

Person who buys or sells securities for investors

52 Week

Stock's highest and lowest prices over the last _____ weeks

Stock SMY

Ticker, easily remembered character string selected by the corporation

Yield (Yld%)

Similar to interest return on a bank deposit. Dividend ___________.

PE Ratio

Ratio of share price to annual earnings per share, measure of valuation, used to determine the value of a companies shares

Market Cap

Market capitalization, total value of a company's outstanding common shares

EPS

Earning per share

Efficient Market Hypothesis

Argument that stocks are always priced about right, and that bargains are hard to find because they are closely watched by so many investors

Mutual Funds

Companies that sells shares of a portfolio of securities (stocks and bonds) issued by other companies

Net Asset Value

Market value of a mutual fund determined by dividing the value of the fund by the number of shares issued

ETF

Exchange traded fund, a collection of different stocks in one fund

Securities Exchange

Physical place where buyers and sellers meet to exchange securities