Understanding the Stock Market. Unit 1 Investing In Common Stocks

Transcription

1 Understanding the Stock Market Unit 1 Investing In Common Stocks

2 Common Stock Common stock represents ownership in a corporation. When you buy common stock, you are buying the corporation's factories, buildings, and products. Common stock is sold in shares. Each share of common stock represents the basic unit of ownership of the corporation.

3 Corporations A corporation is a company that is a separate legal entity owned by stockholders. In other words, the corporation functions like a single person separate from its owners (stockholders). Thus, the stockholders have limited liability.

4 Making Money Two Ways Price appreciation occurs when you sell your stock for more than you paid for the stock. Dividends are the portion of a corporation s profit that is paid to shareholders.

5 More on Dividends Dividends are paid out of a corporation's profit after taxes have been paid. The corporation can, however, retain part of the profit and reinvest it in the corporation. This portion is known as retained earnings and it is frequently used for research and development or expansion. A corporation doesn't have to pay dividends.

6 More on Dividends continued Dividends do not even have to be paid with money. The board of directors can elect to issue stock dividends. When this is done, the current stockholders would receive more shares of the corporation's stock rather than cash.

7 Capital Gains and Losses When investors sell stocks for more than they paid, the profit made from the sale is the investor's capital gain. When a stock sells for less than the investor paid for it, the investor suffers a capital loss.

8 Equity and Risk Capital The money an investor uses to buy stocks is called equity capital. Because you can make or lose money through investments, you must determine the amount of money that you can afford to lose without harming your standard of living. The amount of money an investor can afford to lose is called risk capital, and that is the amount that should be invested. Remember, invest only what you can afford to lose.

9 The advantages of a corporation A source of capital is available from the sale of stock. Stockholders have limited liability. A corporation has perpetual business life. Transfer of ownership is easy because it's fairly easy to transfer stock from one person to another.

10 The disadvantages of a corporation Taxes are usually higher for corporations than for other forms of business. There is more government regulation of corporations. There are more reports and paperwork in a corporation.

11 TYPES OF CORPORATIONS Corporations may be A closed classified in many ways. If corporation is one stock is available for whose stock is not purchase by the public, it available to outsiders, is an open corporation. it does not issue stock The corporation is required to the public and is by law to disclose its not required to financial condition. Most disclose publicly its large corporations are financial condition. open corporations..

12 HOW A COMPANY LEGALLY BECOMES A CORPORATION Anyone can form a corporation. In some states one person can form a corporation. In others, two or more people are required. The first step in forming a corporation is to hire a lawyer to file the Articles of Incorporation with the state in which the business is to be incorporated.

13 Articles of Incorporation Articles of Incorporation give a written purpose or reason for incorporating. For example, the purpose may be to make a product or to offer a special service. Whatever the purpose of the business it must be stated in the Articles of Incorporation.

14 The Corporation s bylaws Also contained in the Articles of Incorporation are the bylaws. The bylaws are the regulations by which the corporation will be governed. Once the bylaws are filed, changes can by made only by amending the bylaws.

15 Board of Directors Every corporation has to have a board of directors. Members of the board are elected by the stockholders at the corporation's annual meeting. The board members, in turn, appoint officers who carry out their policies.

16 Authorized Stock All corporations must issue stock. The state issuing the Articles of Incorporation authorizes the number of shares a corporation can issue. That number represents all the shares a corporation can issue without going back to the state and requesting that the state allow more shares to be issued.

17 Issued Stock These are the shares of stock that the company has sold (issued). The issued shares represent ownership. Authorized but not issued are held for future sales to raise funds (capital) for future growth.

18 The Annual Report An annual report is a financial report issued to stockholders at the end of each operating year. An annual report will present the financial condition of the corporation, the names of the board of directors, the location and date of the next stockholder's annual meeting, an auditor's report verifying the authenticity of the financial data, and the shareholder's letter.

19 Balance Sheet and Income Statement The balance sheet lists the corporation's assets and liabilities. The income statement lists the revenue (income), expenses, and profit or loss for the year. A stockholder can get a good idea of the financial condition of a corporation from analyzing the balance sheet and the income statement. Some corporations will even include a five-year financial summary.

20 Other Business Structures A sole proprietorship is a business owned by one person. The owner has complete control over the business and makes all decisions. Thus, the owner is also responsible for all aspects of running the business. A partnership is a business that is owned by two or more people. A part nership is similar to a sole proprietorship. The main difference is that decision-making and profits are shared by the partners. Partners share profits or losses equally if they have not agreed on a profit-and-loss sharing arrangement.

21 Advantages of a sole proprietorship The owner is boss and makes all the decisions. All profits belong to the owner It is easy to start because no special contracts or agreements are needed It is easy to quit because the owner just has to pay the debts and sell the assets It usually pays less tax than a corporation

22 Disadvantages of a sole proprietorship Unlimited liability The owner may lack special abilities needed to run the business Loans may be more difficult to obtain because only one person is responsible for the loan If the owner dies, the business dies because the owner is the business

23 Main Disadvantage The main disadvantage of a sole proprietorship is unlimited liability. The owner personally responsible for all the debts of the business. Therefore, if the owner is unable to pay the debts that the business has incurred, creditors can take the personal assets of the owner, including the owner's home, car, boat, bank accounts, stocks, and any other assets.

24 Advantages of a partnership Having someone to share the workload Relatively easy to start. Has more initial capital than a sole proprietorship be cause two or more people contribute funds The skills and abilities of each partner are pooled to operate the business

25 Disadvantages of a partnership Unlimited liability Partners may argue One partner may not work as hard as the other It may be difficult to quit the business because the partners must agree on how to dissolve the partnership

26 Main disadvantage As in a sole proprietorship, the main disadvantage of a partnership is unlimited liability. The partners are personally responsible for all debts of the business. Therefore, if the partners are unable to pay off the debts of the business, creditors can take the personal assets of the partners, such as their homes, cars, and boats.

27 Limited Partnership Is a partnership in which not all the partners have unlimited financial liability. The limited partner invests in the business but does not participate in the managing of the business. Therefore, his or her liability is limited to the original investment. At least one person must be a general partner with unlimited liability and a certificate of limited partnership must be filed naming the limited partners.