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  • 1. Business Organization, Market Structure & Investment Unit 3
  • 2. Market Structure
    • Market Structure – the organization of a market that is based upon the degree of competition among businesses
    • 4 Market Structures
      • Perfect (Pure) Competition
      • Monopolistic Competition
      • Oligopoly
      • Monopoly
  • 3. Characteristics of Market Structure
    • Number of Producers
      • Markets with more businesses will be more competitive
    • Similarity of Products
      • Similar products create more competition
    • Ease of Entry
      • Markets that are easy to get into are more competitive
    • Control over Prices
      • Ability to influence price gives a company more market power
  • 4.
    • - A market where a large number of firms produce essentially the same product
    • Characteristics
      • Many producers & consumers
      • Identical Products
      • Easy entry into the market
      • No control over prices (price takers)
    #1 Perfect Competition
  • 5.
      • IMPORTANT – *If these competitors can make you buy into their “brand”, they can raise their prices within a narrow range*
    #2 Monopolistic Competition
    • Characteristics
      • Many producers
      • Differentiated Products
        • Could be real or “perceived differences”
        • Use nonprice competition
      • Few barriers to entry
      • Some control over prices
    - A market where a large number of firms produce goods that are similar but varied
  • 6. REVIEW Perfect Competition Monopolistic Competitive Oligopolies Monopolies
  • 7.
    • **IMPORTANT – Each firm has the ability to cause a change in output, sales, & prices of entire industry!!**
    #3 Oligopoly - A market where a few firms produce similar or identical products
    • Characteristics
      • Few Producers
      • Similar Products (minor variations)
      • High barriers to entry
      • Some control over prices
    • Independent Behavior
      • Price Leadership/War
      • Collusion
  • 8. #4 Monopoly
    • Characteristics
      • One producer
      • Unique Product
      • High barriers to entry
      • Substantial control over prices (price setters)
    - A market where there is a single producer of a product that has no close substitutes Do we have monopolies in the U.S.?
  • 9.
    • Resource Monopoly
      • Exist when a single producer owns or controls a key natural resource
    • Government-created Monopoly
      • Exist when the government grants a single firm or individual the exclusive right to provide a good/service
      • Ex. Patents & copyrights, public franchises, and licenses
    • Natural Monopoly
      • Exist when a single firm can supply a good or service more efficiently and at a lower cost than two or more firms could.
      • Governments see these as beneficial!
    • Geographic Monopoly
      • Occurs when a town is too small to support two or more of the same business
    Types of Monopolies
  • 10. REVIEW Perfect Competition Monopolistic Competitive Oligopolies Monopolies
    • 1. What can you invest in? Which are the best/worst?
    • 2. What investments do you have? Your parents?
    • 3. What are the risks and rewards of investing?
  • 12.
    • People invest to make money off of their savings!
    • Investment allows businesses to expand!
    • All of this leads to ECONOMIC GROWTH
      • People invest their money in financial securities (also called investment options or financial assets)
        • Financial Securities - Investments that give their holders some form of return, or profit
    Importance of Investment
  • 13.
    • Risk vs. Return Relationship
      • Risk – situation in which the outcome is not certain, but probabilities can be estimated
      • = the higher the risk (of losses rather than gains), then the higher the possible returns
    • Other Considerations
      • Investor objectives
    What to know before investing!
  • 14. What are my investment options?
    • Some of the major investment options are
      • Bonds
      • CDs
      • Stocks
      • Mutual Funds
  • 15.
    • Bonds – certificate issued in exchange for borrowed money plus interest
    • Characteristics:
      • Interest (coupon) – borrower promises to pay this on top of repayment (cost of borrowing!)
      • Maturity – the life of the bond (“stated period of time”)
      • Principal – amount of borrowed money (original amount is repaid at maturity)
    Investment Option #1: Bonds
  • 16.
    • Example:
    • Offer: 6%, 20 year, $1,000 bond w/ interest semi-annually
    • (.06 x 1,000) / 2 = 30
    • Earnings on Bond:
    • Interest Payment is $30, twice a year, for 20 years = $1200
    • Get back initial investment = $1000
    • You get back: $2200
    How do we calculate the worth of a bond?
  • 17.
    • Most corporate bonds are rated on the financial health of the issuer, the ability to make future interest and principal payments, and the issuer’s past credit history.
    • Bond ratings , ranging from D (lowest) to AAA (highest), indicate the quality of the bond.
    • AAA to BBB are usually higher quality bonds while Junk Bonds (like BB to D) are the riskiest!
    Which bonds are best??? = Bond Ratings
  • 18.
    • U.S. Government Bonds (Saving Bonds & T-Notes, T-Bills, & T-Bonds)
      • Issued by the Federal Government when it needs money
      • All of these investments are the safest & most attractive because have no risk of default
      • These bonds usually have low interest rates = low returns
    • Municipal Bonds
      • Issued by state and local governments and are regarded as a safe, tax-exempt investment.
    • Corporate Bonds
      • Issued by corporations and are usually used for long-term investment
      • This is a riskier bond to invest in = businesses go bankrupt!
    Types of Bonds
  • 19. Investment Option #2: CDs
    • Certificates of Deposit (CDs)
    • These are loans (savings deposits) that you make to financial institutions (banks!)
      • You choose the length of maturity, and usually receive a good interest rate for your CD (a higher rate than a normal savings account)
    • Payment at Maturity = Original Amount + Interest
  • 20. Investment Option #3: Stocks
    • What are they?
      • Stocks represent shares of ownership in a corporation
    • Who issues stock?
      • Corporations
    • Why issue stock?
      • To raise funds to help out the business
    • How do investors make money by buying stocks?
      • Two ways of making money
        • 1. Capital gains – buy low, sell high (stock value appreciates)
        • 2. Dividends - payments of corporate profits to its stockholders
  • 21. Investment Option #4: Mutual Funds
    • A mutual fund is just a SPECIAL stock
    • A mutual fund company pools the money of investors in order to buy stocks, bonds, or other investments in a variety of OTHER COMPANIES
    • Advantages of Mutual Funds
      • Your holdings become more diverse
      • Your money is more safe because losses in the value of one stock can be made up by gains in the value of another stock
  • 22.
    • LIFE
    • Capital Market: money is loaned for more than one year
    • Money Market : loans of less than a year
    • Primary Market: nontransferable investments
    • Secondary Markets: transferable investments
    Characteristics of Securities
  • 23. Wait…don’t corporations already raise money by issuing bonds?
    • Yes, you’re right! Corporations use both bonds & stocks to raise money. But here are some differences between the two:
      • Stocks represent ownership - Bonds represent debt
      • Stocks don’t have a fixed return rate – Bonds have a fixed return rate
      • Stocks do not have a maturity date – Bonds do have a maturity date
  • 24. The Stock Market
  • 25. 1. What type of stock represents ownership in a corporation? 2. Which type of stock gives its owner voting rights in the corporation? Two Types of Stocks: What are the major differences between common stock and preferred stock???
  • 26. Stock Market Terms
    • Who are stockholders/shareholders ?
      • People who have invested in a corporation by purchasing stocks
    • Who are stockbrokers ?
      • Buying & selling middle man that helps to conduct securities transactions
  • 27. Stock Exchange – places where buyers & sellers meet to trade stocks
    • The New York Stock Exchange (NYSE)
      • Physical Exchange located on Wall Street in NYC
      • Oldest, largest, most prestigious Stock Exchange
      • lists the shares of more than 3,000 large companies, and has 1,400 seats or memberships with access to the trading floor.
  • 28. Other Stock Exchanges
    • Global Stock Exchanges
      • Include exchanges throughout the world (major cities)
    • Regional Stock Exchanges
      • Focused around major cities
      • Usually smaller corporations or new ones
      • Ex.’s: Philadelphia, Boston, Chicago
  • 29. Other Stock Exchanges
    • Majority of stocks are traded OVER-THE-COUNTER = electronic marketplace for securities that are not listed or traded on an organized exchange
    • Virtual Exchanges –
    • NASDAQ – largest American virtual exchange where trading is done through network of computers
          • Lists stock prices for about 3,800 companies
          • Many of these companies are high-tech
  • 30. What determines a stock’s price?
    • Investors perceptions of what a stock is worth influenced by:
      • Company earnings
      • Recent company news
      • State of the U.S. and world economy
      • Trends or World Events
  • 31.  
  • 32. How do we measure the performance of the entire market? Use a market index
    • Dow-Jones Industrial Average (DJIA)
      • Publishes the average closing price for 30 representative stocks
      • Look at % change to see how market is doing
      • Uses only stocks on NYSE
    • Standard & Poor’s 500 (S&P 500)
      • Stock performance index that uses price changes of 500 representative stocks as indicator of market performance
      • Measures stocks from more than one stock exchange
    • Nasdaq Composite Index
        • Stock performance index that uses price changes of over 3,000 representative stocks from Nasdaq ONLY
  • 33.
      • Market in which prices are rising
      • Market in which prices are falling
    BULL MARKET VS. BEAR MARKET!!! What type of market do we have now? How do you know?
  • 34. What is day trading?
    • Buying and selling a particular stock in the same day!
  • 35. What’s insider trading?
    • Occurs when an insider (person who owns a large portion of company or is employed there) trades on NON-PUBLIC information
    • This gives them an advantage over normal investors!!!
  • 36. Investment Techniques
    • Long positions (“going long”)
      • Buying a security at a lower price with the expectation that it will increase in value over time and then you can sell for profit
    • Short positions (“short sell”)
      • act of selling stock that you don't own at a high price by borrowing it from a brokerage and then buying it back at a lower price in the future. The expectation is that the price of the stock falls and you can buy it back at a lower value, thus profiting!
    • Options
      • contracts that give investors the option to buy or sell securities at some point in the future at a price agreed upon today
      • Call Option vs. Put Option
      • Call option – right to buy in future
      • Put – right to sell in future
  • 37. Time Frame of Trading
    • Spot Markets
      • Market in which a transaction is made immediately at the prevailing price
    • Futures Markets
      • markets in which futures are bought & sold
      • Futures: contracts to buy or sell at a specific date in the future, at a price specified today
    • Options Markets
      • Markets in which options are traded
      • Options: contracts that give investors the option to buy or sell securities at some point in the future at a price agreed upon today
      • Call Option vs. Put Option
      • Call – buy in future
      • Put – sell in future
  • 38. Why is diversity important?
    • Downfalls of Investing
      • The Efficient Market Hypothesis states that it is not possible to “beat the market” regularly.
      • “ Don’t put all of your eggs in one basket”
    • Solution
      • Instead of trying to beat the market, investors should diversify their portfolios by holding a large number of different stocks, bonds, assets, etc. or enlist the assistance of a stockbroker.