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Unit #3 student1


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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?