Where Do Businesses Get Money? Sole Proprietorship A business owned by a single person gets its money from that person. Partnership A business owned by a small group gets its money from its partners. The owners of Sole Proprietorships and Partnerships are personally liable for all business losses, and personally subject to lawsuits against their businesses! continued 

Where Do Businesses Get Money? Corporation Most businesses need more money than a single owner or a small group of owners can provide, so they organize as a corporation. One way a corporation gets money is from its stockholders, who become owners in the corporation when they buy shares of stock. (Equity Financing – the corporation does not have to repay the money a stockholder pays for stock). Corporate shareholders have only a limited liability for the losses incurred by their company – limited to the amount of money they have invested in the corporation! This is a BIG advantage!

Private vs. Public Corporations Shares in private corporations are not sold on the stock market, and can only be purchased from current stockholders, which are generally a small group of people. A large majority of corporations in the United States are private. Shares in public corporations can be openly traded on the stock market.

Regulating Public Corporations SEC (Securities and Exchange Commission) – federal agency that establishes and enforces regulations in the securities market to protect investors. Companies issuing new securities to the public are required to file registration information with the SEC. Prospectus – the document that discloses the financial information filed with the SEC. Accounting – publicly traded corporations are required to have their annual financial statements prepared by an outside accounting firm. The SEC protects investors!

Primary and Secondary Market Primary Capital Market – the initial sale of new stock or bonds directly from the corporation to investors. The corporation receives money from the sale. When this initial sale of new stock is coming from a business that has never issued stock before, it’s called an initial public offering (IPO). IPO’s are risky because we have no history about their stock performance. Secondary Capital Market - existing financial securities changing hands between investors who buy and sell on the stock market. Where do the proceeds of these sales go?

The Stock Markets A stock market is a marketplace where brokers, who represent investors, meet to buy and sell securities Security Exchanges (physical location) – NYSE – listed companies are national corporations that have at least $100,000,000 in outstanding stock and trade an average of at least 100,000 shares/day. – AMEX - listed companies are national corporations that have more than 500,000 shares outstanding and trade an average of more than 1,000 shares/day. – Regional Exchanges – Philadelphia, Chicago, Boston and San Francisco trade the stock of companies in their regions

The Stock Markets (continued) Over-the-Counter Market (electronic marketplace) – NASDAQ – The marketplace for stocks not listed on a securities exchange. No physical location; trades done through a computer network. It is considered the home of tech stocks (Microsoft, Intel and MCI are good examples). While some large companies are traded on NASDAQ, it generally handles trades for forward-looking companies who are fairly small.

Brokerage Firms Full-service brokerage firm – – provide personalized investment advice – free research – wide variety of financial products and services – charge the highest commissions Discount brokerage firms – – provide little or no investment advice – do not maintain research departments  charge $ for research – limited number of financial products and services – charge lower commissions Online brokerage options – – Provide no investment advice – Limited research available; could be a charge for it – Lowest commissions because there is no broker involved

Caveat Emptor! A full-service broker is a salesperson first and an advisor second! While the broker may sincerely want to help you, to make money, he has to sell the product to you! Commission are paid on stock transactions, so they often encourage you to buy and sell stocks when you really ought to hold! Do you know what this is called?

Churning Buying and selling within your portfolio to generate more commission. Illegal, but difficult to prove. Understand your broker’s recommendations, and make the final decision yourself!

Execute an Order – How it Works (At A Security Exchange) Call your broker to place order. Orders in even hundreds of shares are called round lots (i.e. 100, 200). Orders not in even hundreds (i.e. 60, 128) are called odd lots. Expect a higher commission on odd lot trades. Broker sends order to firm’s order room at stock exchange Order room clerk electronically sends order to the specialist (of the company whose stock you are buying or selling) working on the exchange Specialist matches buy and sell orders – executes transaction Information of the transaction is input into the ticker system. A confirmation is relayed back to your broker, who relays it to you. Payment for purchase of stock is required within 3 days. A stock certificate is received in 4-6 weeks.

Types of Orders Market Order – Request to buy or sell at the current market value Limit Order – Request to buy or sell at a specific price (or better) Stop Order – Used for selling stock only. A type of limit order to sell stock at the next available opportunity when a specific price is reached. Does not guarantee the stock will be sold at the price you specified, but it does guarantee it will be sold at the next available opportunity. You can place a time limit to your Stop and Limit orders – a day, a week, a month, or GTC (good ‘til cancelled)

Investment Strategies Investments can be categorized into two types: 1. Long-Term: investments held for greater than a year (if you do this, you are considered an Investor) 2. Short-Term: investments routinely bought and sold within short periods of time (if you do this you are considered a Speculator) RISKY!!

Investors: Long-Term Investment Strategies 1. Buy-And-Hold Technique – A typical long-term investing method where you buy stock and hold it for a number of years. – Benefits: Receipt of dividends Increase in value from price appreciation Increase in value from stock splits (generally, after a stock splits, its value increases over time)

Investors: Long-Term Investment Strategies 2. Dollar Cost Averaging – With this method, you buy an equal dollar amount of the same investment at equal intervals. – Sometimes you’ll buy at a higher price, and sometimes you’ll buy at a lower one. – The price you pay averages out over time. You may even be able to lower the overall cost of your investment. Let’s see how 

Investors: Long-Term Investment Strategies 2. Dollar Cost Averaging (continued)

Investors: Long-Term Investment Strategies 3. Dividend Reinvestment Plans – These plans automatically reinvest any dividends you earn by buying more shares of that stock. – This is a great way to buy stock without paying commissions!

Speculators: Short-Term Investment Strategies 1. Buying Stock on Margin (RISKY!!) – Investors borrow through a brokerage firm part of the money needed to purchase stock. – Interest is paid on this loan. – The goal is to purchase more shares of stock so if the value goes up you sell and make money. – If the stock price falls, you lose! Not only do you still have to pay off the loan, but you owe the broker commission for the transactions and interest on the borrowed money as well.

Speculators: Short-Term Investment Strategies 2. Selling Short (RISKY!!) – You borrow stock from a brokerage firm (stock you do NOT own) and sell it, hoping it will drop in value in a short period of time. – The goal is to replace the stock that you borrowed by buying it back at a lower price than the price you sold it for. – To make money you have to accurately predict the stock will go down in value. If the value increases, you lose – not only do you have to buy back the stock at a higher price, but you owe the broker commission for the transactions and interest on the borrowed stock as well.

THE BULLS, THE BEARS AND THE PIGS The Bulls – A bull market is a stock market with rising prices over an extended time. _________ can increase gains in a bull market. The Bears – A bear market is a stock market with falling prices over an extended time. _________ can increase gains in a bear market. The Pigs – A pig is a greedy animal. Investors who try to make every last cent of gain on an investment may end up with losses!