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Summary General Business Lecture 14
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Summary Lecture 14, General Business
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General Business S1/14(Investment)
Basics of Securities Markets
Securities markets:
o Financial marketplaces for stocks and bonds and serve two primary functions:
Assist businesses in finding long-term funding to finance capital needs
Provide private investors a place to buy and sell securities such as
stocks and bonds
Primary market:
o handle the sale of new securities
Secondary market:
o handle the trading of securities between investors with the proceeds of the
sale going to the seller
Investment Bankers and Institutional Investors
Investment bankers:
o Specialists who assist in the issue and sale of new securities
Institutional investors:
o Large organizations such as pension funds or mutual funds that invest their
own funds or the funds of others
Stocks
Stocks are the shares of ownership in a company
Stock certificate is the evidence of stock ownership
Dividends are the part of a company’s profits that the company may distribute to
stockholders as either cash or additional shares
Common stocks:
o Most basic form of shares
o Holders have the right to vote for the board of directors and share in the
profits if dividends are approved
Preferred stock:
o Owners have no voting rights and are given preference in the distribution of
the dividends before common stock owners
o Preferred stock can be:
callable
convertible
cumulative
Par value / Face value:
o Value assigned when the stock is first issued
o After its initial offering, stock valuation may take place in multiple approaches
Book value:
o Difference between the assets and liabilities as listed on the balance sheet
Market value:
o Price at which the stock is actually sold in the market
Intrinsic value:
o Estimate of what a company is actually worth, independent of book and
market value
, Advantages of issuing stocks:
o Stockholders are owners of a company and never have to be repaid their
investment
o No legal obligation to pay dividends
o Issuing stock can improve a firm’s balance sheet since stock creates no debt
Disadvantages:
o Stockholders have the right to vote for a company’s board of directors
o Issue of new shares can alter control of the firm
o Dividends are paid from after tax profits and are not tax deductible
o Need to keep stockholders happy can affect management’s decision
Capital gains are the positive difference between the price at which to buy a stock
and what to sell for it
Price earnings ratio is the market value per share divided by the earnings per share
Investors can also choose stocks according to their strategy like:
o Blue-chip stocks
o Growth stocks
o Income stocks
o Penny stocks
Stock splits:
o Act of dividing a share into two or more new shares and reducing the market
value by the same ratio
o Cause no change in the firm’s ownership structure and no change in the
investment’s value
o Companies can never be forced to split their stock; this decision must be
made by the shareholder’s meeting
Buying stocks on margin
o Borrowing some of the stock’s purchase cost from a brokerage firm
o Margin is the portion of the stock’s purchase price that the investors must pay
with their own money
o If broker issues a margin call, the investor has to come up with money to
cover the losses
Bonds
Bond:
o Corporate certificate indicating that an investor has lent money to a firm or a
government
Interest:
o Compensation for bondholders for the use of their money, the bond issuer has
to make a payment
Yield:
o interest income a purchaser receives from that bond.
Face value of the bond:
o amount of money, which a bond buyer lends to a bond issuer
Maturity date:
o date on which Lender needs to repay the principal of a bond
Advantages for issuing bonds:
o bondholders are creditors and not owners of the company so they cannot vote
on corporate matters
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