Chapter 8


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Chapter 8

  1. 1. ECONOMICS CHAPTER 8 FINANCING A BUSINESS “ It takes money to make money”
  2. 2. Business Investment <ul><li>If you want more $, you need to grow </li></ul><ul><li>But, remember Scarcity and Opportunity Cost! </li></ul><ul><li>Where to get money? </li></ul><ul><ul><li>Savings </li></ul></ul><ul><ul><li>Profits </li></ul></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><li>Stocks (Equity) </li></ul></ul><ul><li>Other sources: </li></ul><ul><ul><li>Small Business Administration </li></ul></ul><ul><ul><li>Venture Capitalists </li></ul></ul>
  3. 3. Types of Business Investment <ul><li>Bonds: IOU's that loan $ for long-term & repaid after year or more </li></ul><ul><li>Biz or gov’t indebted to bondholder (loaner) </li></ul><ul><li>Lender gets back principal + interest (P & I) </li></ul><ul><li>Gives $ to biz & when bond matures (comes due) they pay back bondholder </li></ul><ul><li>Bond Ratings: “Grade” of Risk - AAA - F; below F is “Junk” </li></ul><ul><ul><li> grade =  interest rate (and risk!) </li></ul></ul><ul><li>If it’s a matter of “cash-flow,” then… </li></ul><ul><li>Short-Term Loans: quick $; quick pay back </li></ul><ul><li>Trade Credit: like charge account; paid @ later time </li></ul><ul><ul><li>Loans from suppliers (construction) </li></ul></ul><ul><li>Financial Institutions: banks, finance companies give loans to customers </li></ul><ul><li>Company - Company: exchange of $ or stock (usually big companies) </li></ul>
  4. 4. Types of Business Investment (cond.) <ul><li>Equity Financing: sell ownership (thru stocks) to raise more $ </li></ul><ul><li>Stock: owning one share of a company </li></ul><ul><ul><li>Company owned by individual investors (Shareholders) </li></ul></ul><ul><ul><li>Owning one share of Nike means you own 1/70,000 of the company </li></ul></ul><ul><ul><ul><li>$ earned on share value of profit = dividend </li></ul></ul></ul><ul><ul><ul><li>You can sell stock @  price for profit </li></ul></ul></ul><ul><ul><ul><li>Stockholders care that business does well </li></ul></ul></ul>
  5. 5. Types of Stock <ul><li>Common Stock: a &quot;regular&quot; share allowing stockholders to have a say in biz. management </li></ul><ul><li>Preferred Stock: </li></ul><ul><ul><li>stockholders don't have voting rights, but have 2 preferential benefits </li></ul></ul><ul><ul><ul><li>Receive dividends before they are paid to common holders (even if no profits, sometimes) </li></ul></ul></ul><ul><ul><ul><li>If biz. folds, they get $ before common holders </li></ul></ul></ul><ul><ul><li>Why offer Preferred Stock? </li></ul></ul>
  6. 6. Stock Market <ul><li>Market where shares of companies are traded for $, stock </li></ul><ul><li>Two Types of stock markets: </li></ul><ul><li>New Issues (Primary) Market : </li></ul><ul><li>Investment bankers sell new shares of stock for corporation </li></ul><ul><li>&quot;closed market” </li></ul><ul><li>Secondary Market: </li></ul><ul><li>Stocks can be bought by regular investors (majority of $ is here)--IPO Market </li></ul>
  7. 7. Stock Market (cond.) <ul><li>Stock values are listed on “Indexes” </li></ul><ul><li>Most major US companies can be found in 3 listings): </li></ul><ul><li>AMEX: American Stock Exchange (industrial/service) </li></ul><ul><li>NYSE: New York Stock Exchange (industrial/consumable/service) </li></ul><ul><li>NASDAQ: National Association of Securities Dealers Automated Quotation (mainly tech. Stocks) </li></ul><ul><li>S&P 500: Standard & Poor’s listing of 500 “top” US companies </li></ul><ul><li>Securities & Exchange Commission (SEC) : Govt agency- </li></ul><ul><li>oversees the exchange of stock and protects investors </li></ul><ul><li>requires public companies disclose summary of stock value ( prospectus ) </li></ul>
  8. 8. Stock Market (cond.) <ul><li>Dow Jones Industrial Average: not a place where stocks are traded! Listing created by Wall Street Journal </li></ul><ul><ul><li>i) List of 30 &quot;bellwether&quot; (&quot;blue chip&quot;) industrial stocks that serve as an economic indicator. </li></ul></ul><ul><ul><li>ii) Shows a representation of the economy's strength & health. </li></ul></ul>
  9. 9. Types of Business Investment (cond.) <ul><li>1) Mutual Funds: run by large investment corps. which buy indv. stocks, bonds & other securities </li></ul><ul><ul><li>a) Your $ (given to fund company) is spread out among many stocks, not one </li></ul></ul><ul><ul><li>b) Handled by professional $ managers </li></ul></ul><ul><ul><li>c) Tend to be &quot;safer&quot; than indv. stock </li></ul></ul><ul><li>2) Factors in Choosing Mutual Funds </li></ul><ul><ul><li>Objective: are you investing for long-term (safe) or short term (make $ quicker) </li></ul></ul><ul><ul><li>Cost: does the fund charge fees per trade, yearly, both? </li></ul></ul><ul><ul><li>Performance: do they meet their objectives; earn $; is it worth the risk? </li></ul></ul>
  10. 10. Why Invest? <ul><li>Stocks, bonds, mutuals, etc. earn you money faster than regular savings accounts </li></ul><ul><li>Contributes to the economy. Investments provide $ to companies who make consumables, which we then buy </li></ul><ul><li>Aggressive Growth? When you're young (20s & 30s) it might be a good time to invest in more &quot;risky&quot; investments while you’re still young (Yes, I’m still young!). The potential to make $ is greater (but so is the risk…be careful!) </li></ul><ul><ul><li>i) as you get older, you move your money into “safer” investments as it becomes necessary to draw on them </li></ul></ul>
  11. 11. Good News when Evaluating Stock: <ul><li>Take-Over Bids: “Friendly” vs. “Hosile” </li></ul><ul><li>Profits: may mean dividends </li></ul><ul><li>Divestiture: “Spinning off” losing/less profitable divisions </li></ul><ul><li>New Product Line </li></ul><ul><li>Gov’t Spending: Gov’t is rich, buys large - could be good for company! </li></ul>
  12. 12. Bad News when Evaluating Stock: <ul><li>High Interest Rates: </li></ul><ul><li>Fed. Reserve Changes: </li></ul><ul><li>SEC Investigations: </li></ul><ul><li>Gov’t Instability: </li></ul><ul><li>Accidents/Product Safety </li></ul><ul><li>Commodity Price Increase </li></ul>