Business Types and Investment Decisions


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Business Types and Investment Decisions

  1. 1. Business Types and Investment Decisions <ul><li>Business Types </li></ul><ul><li>Investment types </li></ul>
  2. 2. What kind of business? <ul><li>Mark’s business is a small firm that designs websites. He has three employees and is the CEO and CFO of the company. He spends most of his evenings keeping on top of the bookkeeping and completing paperwork. His profits and losses appear on his personal tax returns. </li></ul>
  3. 3. What kind of business? <ul><li>Jess and Julie open their very own interior decorating business. Julie is the artistic one and she does most of the design work. Jess controls the finance portion of the company. They share the profits and losses which appear on their personal income taxes. </li></ul>
  4. 4. What kind of business? <ul><li>Mark, Matt, and Michael start their very own software company (look out Bill Gates). They are each involved in the daily operations of the business and also have an annual stockholders meeting to determine basic long term strategy for the firm. The profits from the business are paid out in the form of dividends are taxes as capital gains. </li></ul>
  5. 5. What kind of business? <ul><li>Chris opens his own business with the help of investment from his Uncle. His Uncle is very busy with his own job and only participates in the company at quarterly meetings. The profits from the business are recorded on their personal income taxes. </li></ul>
  6. 6. Strengths and Weaknesses of Business Types <ul><li>What kind of business organization would you choose for each of the following scenarios? Why? </li></ul><ul><ul><li>You are about to open your very own pizza shop. You were able to secure a line of credit from a local bank to start. </li></ul></ul><ul><ul><li>You and your friends have come up with the next “Big Idea” in the internet craze…online car washing service. You know its going to be a big smash and now all you need to do is raise the capital to start. </li></ul></ul>
  7. 7. What is the best choice? <ul><ul><li>Your brother comes to you with a brilliant idea to start a business and you want to help him out and invest but you do not want to give up the financial security of your current job or possibly loose your house. </li></ul></ul><ul><ul><li>You just graduated from law school and you are looking to go out on your own. </li></ul></ul>
  8. 8. What is the best choice? <ul><li>You started a small company in your business several years ago to make some extra money on the side. You have been very successful and now there are several individuals interested in investing with you. </li></ul>
  9. 9. Why Do People Invest Brainstorm <ul><li>What are some reasons people invest? </li></ul><ul><li>What are people looking for in their investments? </li></ul>
  10. 10. Investment Types and Terms <ul><li>Stock- ownership pieces of the firm </li></ul><ul><li>Dividend- a portion of corporate earnings paid out for each share of stock </li></ul><ul><li>Common Stock- basic ownership of corporation; has board voting rights; no guarantee of dividends </li></ul>
  11. 11. Investment Types and Terms <ul><li>Preferred Stock- non-voting ownership often with guarantee of dividends; receives dividends before common stockholders; receives payment first before common stock holds if company is dissolved </li></ul><ul><li>Proxy- ballot that gives stock voting rights to a representative </li></ul><ul><li>Bond- A promissory note </li></ul>
  12. 12. Investment Types and Terms <ul><li>Horizontal Merger- Firms producing similar products combine (same basic process) </li></ul><ul><li>Vertical Merger- Firms performing different steps along the production chain integrate </li></ul><ul><li>Conglomerate- Firm that has at least four business, each making a different product with none of these responsible for a majority of sales </li></ul>
  13. 13. Investment Types and Terms <ul><li>Multinational Corporation- A corporation with manufacturing of service operations in several countries </li></ul><ul><li>Nonprofit Organization- Business-like operations without profit as the main goal; seek to improve well-being </li></ul><ul><li>SRI - Socially Responsible Investment – gives back to the community or world at large in some way </li></ul>
  14. 14. Risk and Return <ul><li>People want to be rewarded for accepting the possibility they may lose their initial investment </li></ul><ul><li>Depending on the type of person, some people may be less comfortable with this risk </li></ul><ul><ul><li>Older individuals tend to seek more secure investments </li></ul></ul><ul><ul><li>Younger individuals tend to look for greater rewards </li></ul></ul><ul><ul><li>Why? </li></ul></ul>
  15. 15. Bonds <ul><li>Used to raise capital for companies, municipalities, and governments </li></ul><ul><li>Loans that pay interest in periodic payments </li></ul><ul><li>At the end of the agreed upon term, the full amount of the loan is repaid </li></ul>
  16. 16. Parts to a Bond <ul><li>Par Value- the amount the bond is originally worth (the amount of money the issuer receives) </li></ul><ul><li>Coupon Rate- the interest rate that will be paid on the bond </li></ul><ul><li>Maturity- length of the bond </li></ul><ul><li>Schedule for payment- how often will the bond pay interest to the holder </li></ul>
  17. 17. Bond Markets <ul><li>Bonds can be bought and sold between individuals after their initial sale </li></ul><ul><ul><li>May not pay the actual coupon rate for the bonds </li></ul></ul><ul><ul><li>Why might the price of the bond change over time? </li></ul></ul><ul><ul><ul><li>Inflation </li></ul></ul></ul><ul><ul><ul><li>Change in interest rates </li></ul></ul></ul><ul><ul><ul><li>Change in the financial situation of the company (increase in risk) </li></ul></ul></ul>
  18. 18. Bond Markets <ul><li>Bond Ratings- a system that rates the risk of all bonds </li></ul><ul><ul><li>AAA is the best </li></ul></ul><ul><ul><ul><li>Very safe </li></ul></ul></ul><ul><ul><ul><li>US treasury bond </li></ul></ul></ul><ul><ul><li>BB/Ba and below are considered Junk Bonds </li></ul></ul><ul><ul><ul><li>Riskier because companies have no other way to raise capital due to bad credit </li></ul></ul></ul>
  19. 19. Bond Markets <ul><li>Depending on the rating of the bond people will be willing to pay different prices </li></ul><ul><li>Current Yield </li></ul><ul><ul><li>Annual interest/ purchase price </li></ul></ul><ul><ul><li>This tells the investor what the actual return is on their bond if they do not pay par value </li></ul></ul>
  20. 20. Types of Bonds <ul><li>Corporate- bonds issued by companies to raise capital </li></ul><ul><li>Municipal- (Munis) issued by state and local governments to finance projects </li></ul><ul><li>Government Savings Bond-bought at a discount from their redemption rate and do not pay interest annually </li></ul>
  21. 21. Types of Bonds <ul><li>International Bonds- corporations selling bonds from outside the US </li></ul><ul><li>Treasury Notes- Gov. obligations between 2-10 years </li></ul><ul><li>Treasury Bond- gov. obligations of 10-30 years </li></ul><ul><li>Treasury Bills- Gov obligation up to 1 year and a min of 10,000 </li></ul>
  22. 22. Types of Markets <ul><li>Capital Markets- money is loaned for periods of more than one year </li></ul><ul><li>Money Market- money is loaned for less than one year </li></ul><ul><li>Primary Market- Initial Issue is the only one that would redeem the asset </li></ul><ul><ul><li>Non transferable </li></ul></ul><ul><li>Secondary market- existing securities can be resold to new owners </li></ul>
  23. 23. Stock Market Basics <ul><li>Listing on the Stock Market </li></ul><ul><ul><li>Very Regulated </li></ul></ul><ul><ul><li>Requirements must be met and fees must be paid to list </li></ul></ul><ul><ul><li>SEC (Securities and Exchange Commission) is the governing body </li></ul></ul>
  24. 24. The SEC <ul><li>What is buying on margin? </li></ul><ul><li>Why do we have the securities and exchange commission today? </li></ul><ul><li>If you were to set up ways to keep a Black Tuesday from occurring again, What would you do? </li></ul>
  25. 25. Stock Market Basics <ul><li>What are the benefits of being listed </li></ul><ul><ul><li>Initial Public Offering- First time stock is sold </li></ul></ul><ul><ul><li>Ease of raising capital </li></ul></ul><ul><ul><li>Prestige </li></ul></ul>
  26. 26. Reading Stock Quotes <ul><li>Large amount of information in the stock sections </li></ul><ul><li>52 week hi/ low </li></ul><ul><ul><li>Lists the highest and lowest prices in a 52 week period </li></ul></ul><ul><ul><li>Gives you an idea of the range a stock price fluctuates between in the past year </li></ul></ul>
  27. 27. Reading Stock Quotes <ul><li>Financials and Ratios </li></ul><ul><li>ALL COMPANIES THAT ARE TRADED PUBLICLY MUST REPORT FINANCIALS </li></ul><ul><li>These list total sales, net income/loss, dividend payouts and much much more. </li></ul>
  28. 28. Reading Stock Quotes <ul><li>Ratios are a tool used by investors and companies to help break down financial data into quick reference numbers </li></ul><ul><li>Price to Earnings Ratio (P/E)-current price of stock/company earnings per share </li></ul><ul><ul><li>A higher P/E USUALLY means that investors expect HIGHER earnings </li></ul></ul>
  29. 29. Reading Stock Prices <ul><li> </li></ul><ul><li>Investing Prospectus </li></ul><ul><ul><li> </li></ul></ul>