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Unit #3 student


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Unit #3 student

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