Unit #3 student1


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  • No single buyer or seller is large enough to affect the price of the product Buyers do not prefer one seller’s merchandise over another (no brand names nor a need to advertise) example – table salt price should not be different b/c no favorites Competition keeps prices low – buyers compete for low prices & sellers compete to get consumer’s dollar (no milk market dominance) Sellers need to keep prices low to attract customers (low prices are known to consumers) Freedom does not allow producers to remain in control of market (what happens is new firms can enter & take away business – just need a cow!) If no preferred brands & identical products then seller could not raise prices otherwise they would lose all customers Ex. Milk, wheat, corn, tomatoes, fishing, oil, cotton, commodities (NO MARKET POWER)
  • PD – although the product being sold is similar from one firm to another, it is not identical (differences may be real or perceived = store location, store design, manner of payment, delivery, service) real differences = sneakers may have shock absorbent soles, high ankle support, reduced weight, pores to breath, different tread perceived = aspirin (federal law forces certain chemicals but some prefer brand names (possibly stronger??) Nonprice competition – no more price competition, advertising & promotional campaigns convince buyers product is better -if consumers think product is special, firms can raise prices so that they are above competitor’s prices -profit maximization = sell within a narrow price range but try to raise the prices within that range to maximize profit (brand loyalty)
  • KEY - # of firms not as important as the ability of any single firm to cause a change in output, sales, and prices in the industry as a whole Examples – McDs / Burger King / Wendy’s or Coke / Pepsi or Domestic Automakers IB – when one firm does something, others follow b/c each firm has considerable power & influence collusion – formal agreement to set prices or cooperate price-fixing – agreeing to charge the same or similar prices (usually higher than at the normal market price) price wars – 1. firm lowers prices 2. other firms follow (series of price cuts by all producers may lead to unusually low prices in the industry (prices may be lower than costs of production)
  • NO PURE MONOPOLIES! = 1. Americans tried to outlaw them, 2. easy to find close substitutes (butter & margarine, private vs. public transportation, 3. new technologies are created to compete with monopolies USUALLY TALKING ABOUT NEAR MONOPOLIES
  • Natural – local telephone companies competing for one area would be wasteful, transit busses, competing gas & water companies gov’t usually gives permission to act as NM b/c they want lower costs (SO SINGLE FIRM CAN SUPPLY A GOOD/SERVICE MORE EFFICIENTLY & AT LOWER COST THAN COMPETITING FIRMS) Geographic – small gas station exists however hard to keep status if making profit OR local drugstore in area that cannot support two (if drugstore is making a lot of $$ then new store opens), stone quarry! Technological – Patent – exclusive right to manufacture, use, or sell for 17yrs Copyright – artists/authors exclusive rights to reproduce, sell, publish for 50 years plus lifetime Government – state stores, postal service, military, water, weapon manufacturing (uranium)
  • Personal saving rate was 10% in 1980 while in 2005 less than 1 % 1. People save & put in a bank 2. Businesses borrow savings 3. New plants & equipment are produced 4.New jobs available (get income!) 5. New goods & service are created What do we do with our savings? Invest it! So that we can pay for education, house, car, retirement, rainy days or hard times
  • Bond is like an IOU that pays interest (called a debt-related security because you are borrowing money) Buying and issuing bonds occurs in the bond markets
  • U.S. gov’t bonds (Treasury bonds usually issued to borrow money for spending) – when federal gov’t needs money they issue bonds (they are always safe b/c gov’t can just print more money or raise taxes if needed to pay back the loan at maturity) CONSIDERED RISK FREE BUT ALSO HAVE LOW YIELDS (low interest rates) Savings – low-denomination ($50 – 10,000) and used for public works projects Other gov’t bonds – differ by lengths of maturity & investment amount Municipal Bonds – raise funds for public projects like building of schools, bridges, & highways Considered a little more riskier but are attractive b/c interest earned is exempt from federal income taxes & state taxes Corporate – higher risk but higher possible return on bond because of bankruptcy threat Risk of buying corporate bond varies according to financial health of the corporation
  • Standard & Poor’s & Moody’s publish bond issuers’ credit ratings Financial strength – ability to make future interest payments and its ability to repay the principal when the bond matures THE HIGHER (SAFER) THE RATING THE LOWER THE INTEREST RATE! Junk bonds – may give 12% interest compared to 8% of gov’t bond
  • Usually you can choose amount (low amount of $) and set the maturity date (this is great for a person who needs $ at certain time) Fixed interest rate & usually higher than a normal savings account
  • Stocks are shares of ownership, not debt security like a bond IN THIS CASE, WHEN CORP. ISSUE SHARES OF STOCKS THEY ARE NOT BORROWING MONEY, RATHER THEY ARE SELLING OWNERSHIP RIGHTS People sometimes invest in non-dividend paying stocks so they expect the price of the stock to rise as the company grows, therefore making their shares worth more over time RISKIER INVESTMENT THAN BONDS USUALLY BUT DEPENDS ON THE CORPORATIONS! Dividends are in the form of a dollar amount for each share owned (the more shares the higher the dividend) – usually holders reinvest dividends to buy more shares of stock then get more dividends over time! Also, the higher the profits, the higher the dividend! Not all companies issue dividends. Many use profits to reinvest in business, so people who invest in the non-dividend paying stocks are looking for capital gains
  • A lot of times have minimum # of shares to buy, and sell at a Net Asset Value (NAV) - The Net Asset Value (NAV) is the current price of a mutual fund, which is calculated at the end of each business day. It is the total value of the fund's assets minus its liabilities and divided by the total number of shares outstanding. It is similar to a stock's closing price for the day. Stock or bond (debt-related) mutual funds where there is a collection of securities chosen & managed by a group of professional fund managers Shares are bought & sold just like a stock Diversification – investing in wide variety of financial assets so as to reduce the risk of poor performance of one Each mutual fund has different goals – stock funds for growth & income from dividends & value appreciation while bond funds offer lower risks & money market funds are short term with higher interest rates than savings accounts but no FDIC insurance Compare funds to market index like S&P or Dow, if not getting same returns then may be not managed well enough
  • Capital vs. Money Market – capital is money lent for periods longer than a year and money market is less than a year Primary vs. Secondary Market – primary is not transferrable (can’t be sold off if needing money like savings bond) and secondary can be traded
  • Young person saving for retirement can lose more than someone who is already retired (has more time to recover)
  • “ Don’t put all of your eggs in one basket” = too great of a risk to only get one type of investment or put all money in one company with same maturity The goal is to reduce the risk of investing while still earning good retunrs
  • A brokerage is a company that buys & sells stocks & bonds for investors (brokers help investors to make & carry out their investment decisions)
  • lists the shares of more than 3,000 large companies, and has 1,400 seats or memberships with access to the trading floor. What is a Blue Chip stock? It is the stock of a large company that has a long history of stable operation and solid stock performance. A great example is General Electric.
  • National Association of Securities Dealers Automated Quotation (many new high tech companies that usually do not pay dividends) Nasdaq is still today sometimes called an OTC market, but has become more of an organized exchange over time Investors buy directly from dealer/broker who searches for other dealers/brokers on the OTC market for the best price
  • Federal agency created during Great Depression Makes sure firms release info in legal document, known as prospectus, that help investors to make informed decisions about whether to buy or sell What is the SEC? The Securities and Exchange Commission (SEC) is the government agency responsible for protecting investors by monitoring and regulating brokers, dealers, and the stock and bond markets in the U.S. They also make sure publicly-traded companies disclose the required business details to the public.
  • Sometimes trade after seconds or minutes!
  • Futures – buy at a price today but receive commodities or assets in the future (grain & livestock exchanges), person selling is betting price will go lower while buyer thinks price will go higher, each must pay each other for changes in value Options – difference is that someone can back out of the agreement (not an obligation) usually 3-6 month options call – right to buy a share of stock at a specified price some time in the future put – right to sell a share of stock at a specified price some time in the future ex. Call – pay $2.50 per share for option, gives right to purchase 100 shares of stock at $70 during a specified period of time(right now its at $65), if price drops to $30 then tear up option, buy for cheaper but if stock price goes up to $100 purchase stock at $70 ex. Put - $2.50 per share for option, right to sell at $50 (currently at $55), if stock price drops can require to sell at $50, if higher then tear up and sell at higher price
  • What determines a stock's price? There are many factors that play into a stock's price. Overall, though, the price is determined by investors' perceptions of what the stock is worth. Important factors – how many shares are there? (small amount but profitable then worth more, if small & less profitable then shares are worth less) also expectations (if two companies are = but one has better future prospects then price is higher) Some of the biggest factors include:     How big and successful the company is (especially its earnings)     Recent company news     The state of the U.S. and world economies     Whether there is a bull or bear market     World events, whether good or bad
  • When people say “The stock market rose today”…. A market index measures the change in value of a group of stocks, bonds, or other investments compared to a specific starting point What is the Dow Jones or the DJIA? The Dow Jones Industrial Average (often referred to as the "Dow") is an averaged number representing the values of 30 U.S. "blue-chip" stocks. The DJIA is the most well-known market indicator in the world and was created in 1896 by Dow Jones & Company, which is actually a publicly-traded company (DJ) on the New York Stock Exchange (NYSE). They produce many important business publications including The Wall Street Journal, Barron's, and several stock indexes. Started with only closing price of 11-12 stocks What is the S&P 500? The S&P 500 is a stock index published by Standard & Poor's. It measures 500 U.S. stocks that are supposed to be representative of the overall stock market (choose stocks that represent certain industries as components of the economy). It was created in 1957. uses NYSE, AMEX, & OTC
  • Bull markets are good & have been most prevalent over bear market
  • Unit #3 student1

    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>1. People invest to make money off of their savings ! </li></ul><ul><li>2. This investment allows for… </li></ul><ul><ul><li>Consumers get loans to demand more things </li></ul></ul><ul><ul><li>Businesses to get loans to expand </li></ul></ul><ul><li>3. Eventually, our economy experiences ECONOMIC GROWTH </li></ul>Importance of Savings & Investment
    13. 13. Investment Basics <ul><li>Financial Securities – </li></ul><ul><ul><li>Investments that give their holders some form of return, or profit </li></ul></ul><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>
    14. 14. Examples of Popular Financial Securities <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>(essentially an IOU that pays interest) </li></ul><ul><li>Characteristics: </li></ul><ul><ul><li>Interest – money paid periodically in return for the use of borrowed funds </li></ul></ul><ul><ul><li>Maturity – the life of the bond or end of term of the investment </li></ul></ul><ul><ul><li>Principal – amount of borrowed money ( </li></ul></ul>Security #1: Bonds
    16. 16. <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 </li></ul></ul><ul><ul><li>This is a riskier bond to invest in because businesses go bankrupt ! </li></ul></ul>Types of Bonds
    17. 17. <ul><li>Bonds are rated on how “safe” the investment is </li></ul><ul><ul><li>Rating examines the issuer’s financial strength </li></ul></ul><ul><ul><li>Kind of like a credit check for those providing investments! </li></ul></ul><ul><li>Ratings range from… </li></ul><ul><ul><li>AAA to BBB are safest bonds </li></ul></ul><ul><ul><li>BB to D are riskiest bonds (called junk bonds) </li></ul></ul><ul><ul><li>Which will give you a better return? </li></ul></ul>Investors Need to Examine BOND RATINGS
    18. 18. Security #2: CDs <ul><li>Certificates of Deposit (CDs) </li></ul><ul><li>Deposits (also called time deposits) of money in bank that you earn interest on for a set period of time </li></ul><ul><li>You can take out your money earlier than maturity date, but you have to pay a PENALTY </li></ul><ul><li>Advantages- FDIC insured, choice of maturity date, & low cost! </li></ul>
    19. 19. Security #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>Why issue stock? </li></ul><ul><ul><li>Corporations use stock to raise funds to expand their business </li></ul></ul><ul><li>How do investors make money by buying stocks? </li></ul><ul><ul><li>Two major 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 portions of corporate profits to its stockholders </li></ul></ul></ul>
    20. 20. Security #4: Mutual Funds <ul><li>A mutual fund is a collection of securities chosen and managed by a group of professional fund managers </li></ul><ul><li>Advantages of Mutual Funds </li></ul><ul><ul><li>Your holdings become more diverse </li></ul></ul><ul><ul><li>A fund manager (so called expert) manages the investments so they do all of the research! </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>
    21. 21. Comparison of Different Securities <ul><li>You should understand the security’s… </li></ul><ul><ul><li>Risk Level : chance of losing money </li></ul></ul><ul><ul><li>Return Level : amount of money an investor receives above and beyond the sum of money that has been invested </li></ul></ul><ul><ul><li>Liquidity Level : ease and ability of investment to be used as or converted into cash </li></ul></ul>
    22. 22. Investment Decisions are Personal! <ul><li>Decisions should be based on… </li></ul><ul><ul><li>Investor’s Age </li></ul></ul><ul><ul><li>Risk Tolerance </li></ul></ul><ul><ul><li>Financial Goals </li></ul></ul>
    23. 23. Why is diversity important? <ul><li>“ Don’t put all your eggs in one basket!” </li></ul><ul><li>Diversification – investing in a wide variety of securities so that your risk is diluted </li></ul><ul><li>Your goal should be to reduce the risk of investing while still earning good returns! </li></ul>
    24. 24. 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>
    25. 25. The Stock Market
    26. 26. Investing in the Stock Market <ul><li>Who are stockholders/shareholders ? </li></ul><ul><ul><li>Investors who buy a company’s stock </li></ul></ul><ul><li>Who are stockbrokers ? </li></ul><ul><ul><li>People who help investors carry out their investment decisions </li></ul></ul><ul><li>Where can you invest? </li></ul><ul><ul><li>Most people enlist the help of a brokerage , a company that buys and sells securities for investors </li></ul></ul>
    27. 27. Stock Exchange – a market for buying and selling stock <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>Handles the exchange of over 2 billions shares of stock per day </li></ul></ul><ul><ul><li>One of the largest and most prestigious Stock Exchanges </li></ul></ul><ul><ul><li>Began in 1792 as outdoor exchange </li></ul></ul><ul><ul><li>Trades “ blue-chip” companies – those companies that have been the most profitable over time </li></ul></ul>
    28. 28. Stock Exchange <ul><li>NASDAQ </li></ul><ul><li>Stands for National Association of Securities Dealers Automated Quotation </li></ul><ul><li>Created in 1971 </li></ul><ul><li>largest American electronic exchange where trading is done through network of computers </li></ul><ul><li>Lists stock prices for about 3,800 companies </li></ul><ul><li>Many of these companies are high-tech </li></ul>
    29. 29. SEC <ul><li>The Securities and Exchange Commission regulates the stock market </li></ul><ul><ul><li>Goal: make sure all investors have access to the same financial information about firms issuing stock </li></ul></ul>
    30. 30. How Stock is Traded – DAY TRADING <ul><li>Buying and selling a particular stock in the same day! </li></ul><ul><li>Trader hopes to ride a rising stock’s momentum for a short time and sell the stock for a quick profit </li></ul><ul><li>Very risky practice </li></ul><ul><li>Traders usually move high volumes of stock </li></ul>
    31. 31. How Stock is Traded – 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>
    32. 32. How Stock is Traded <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>
    33. 33. Stock Price Changes <ul><li>Stocks prices move because of investors’ perceptions of what a stock is worth </li></ul><ul><li>Perceptions influenced by: </li></ul><ul><ul><li>Company earnings </li></ul></ul><ul><ul><li>Expectations </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>
    34. 34. Measuring the Performance of the Market <ul><li>We use a market index </li></ul><ul><ul><li>Index measures changes in the value of a group of stocks, bonds, or other investments from a specific starting point </li></ul></ul><ul><li>So the index will tell us how well the market is doing as a whole! </li></ul>
    35. 35. Market Indices <ul><li>Dow-Jones Industrial Average (DJIA) </li></ul><ul><ul><li>Began in 1896 </li></ul></ul><ul><ul><li>Tracks the stock prices of 30 large U.S. corporations on NYSE in a variety of industries </li></ul></ul><ul><ul><li>Companies can be dropped & added </li></ul></ul><ul><li>Standard & Poor’s 500 (S&P 500) </li></ul><ul><ul><li>Began in 1957 </li></ul></ul><ul><ul><li>Tracks stock prices of 500 corporations in multiple exchanges </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>
    36. 36. <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>Good vs. Bad Markets What type of market are we in now?