business finance (stocks and bonds). meet their every day expenses including: payroll, rent,...
TRANSCRIPT
CHAPTER 5Business Finance
(Stocks and Bonds)
WHY DO BUSINESS FIRMS NEED MONEY?
Meet their every day expenses including: payroll, rent, utilities, etc
Replace and expand their inventory
Expand and grow through purchasing more space or equipment
Meet the interest/ pay off debts
SHORT TERM VS. LONG TERMFINANCING
Short-Term Financing refers toLess than a year
Trade Credit Bank Loans (Short term) Retained Earnings
Long-Term Financing refers to One year or more
Long Term Loans Bonds Stocks
SHORT-TERM FINANCING
Trade Credit
Most common type of short term financing
Many times it can be very informal (handshake or verbal ‘ok’)
Business suppliers give customers 30 to 60 days to pay for their orders
SHORT TERM BANK LOANS Banks generally will allow anyone to borrow
from a line a credit with a document signed and sealed which has the following items:
Promissory Note- the written promise to repay a loan plus interest at a specified date
A line of credit- a loan arrangement in which a bank allows a business to borrow any sum, up to a specified limit
Terms of repayment- how this loan will be repaid
RETAINED EARNINGS Retained Earnings
These are profits that are not distributed to the owners of a business
For a stock this means NO DIVIDENDS, which could hurt a stock price significantly
Another term for retained earnings is “undistributed profits”
LONG-TERM SOURCES OF FUNDS Corporations have three long-term
financing sources available to them:
Long-term loans
Bonds
Stocks
LONG-TERM BANK LOANS Long-term loans refer to loans that are a
year or more
They are usually used for The purchase of new machinery
The purchase of new real estate
Collateral has to be put up for these loans
Collateral is any item of value that the lender may seize should the borrower fail to make loan payments as promised.
That’s the plot for our awful movie!!!
BONDS… BUT BEFORE WE DO THAT, As opposed to sole proprietorships and
partnerships, corporations have the ability to sell stocks and bonds
Stocks represent ownership in a company
Bonds are certificates issued in exchange for a loan.
JUST… ONE.. MORE… SECOND…
Thus stockholders are part owners of a business
Bondholders are among the creditors (financiers) of a business
BOTH are known collectively as SECURITIES
BONDS… (NOT JAMES BONDS)…
BONDS A bond is a kind of a long-term “IOU”/ LoanTo investors who buy these bonds
It is a promise by a corporation, OR GOVERNMENT to repay: a specified sum (the face value of the loan)…… at the end of a specific number of years (term) … along with annual interest
The total of the actual money loaned is called the principal
CORPORATE BONDS AND BANKRUPTCY
Since bonds are debt of a corporation, bondholders are among its creditors
If a company goes bankrupt (unable to pay off its debts), it will pay off its bondholders first and other creditors after
If there is ANY money left, and most likely there won’t be, stockholders are paid
TO BOND OR NOT TO BOND… Many people consider bonds to be more
secure then stocks…
This may be generally true but any security is only as good as the company/ government that issues it
GOVERNMENT BONDS
Most people are just familiar with “Class EE” savings bonds…
SERIES EE SAVINGS BONDS This savings bond has an initial cost of $50,
and will be worth $100 after a number of years
Like corporate bonds, government bonds are evidences of debt.
When we purchase this bond, we are lending the government money
In exchange for this money, the government is promising to repay the loan, plus interest on the bond
GOVERNMENT BONDS All levels of government- local, state,
and federal- sell bonds from time to time
All bonds are issued in exchange for a loan and thus represent a promise to repay the loan with interest
The reasons for government bonds range from just a standard raising of funds to specific projects. Some include…
YANKEE STADIUM
EQUITY FINANCING Equity Financing refers to the sale by a
corporation of shares of its stock as a means of raising capital
Even though it seems huge, this only accounts for only 4% of the funds raised by corporations
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STOCKS Again, a stock is a certificate that
represents ownership in a corporation
People can purchase these stocks in a Stock Exchange or Stock Market
Stock Exchanges/ Stock Markets are places where shares of the nation’s major corporations are bought and sold
STOCKS: COMMON STOCK There are two type of stock:
Common Stocks entitle their owners to vote in Board of Directors elections.
These stocks can get a dividend, but not always
All corporations issue these stocks
STOCKS: PREFERRED STOCK
Preferred Stocks have NO VOTING RIGHTS
…but are entitled to a fixed dividend which is paid before Common Stock holders
And it is a dividend GUARANTEED to be paid.
ADVANTAGES/ DISADVANTAGES OF STOCKS AND BONDS (SECURITIES)
Advantages of Bonds• If a company goes bankrupt,
Bonds are still paid off
• Less risky of the two securities
• Corporations AND GOVERNMENTS can create Bonds
Advantages of Stocks• Higher possible rate of return
• Can be bought or sold at anytime
• Can be purchased easily online
Disadvantages of Bonds• Takes years to get the guaranteed
money
• Lower rate of return
• Government bonds are harder to come by
Disadvantages of Stocks• More risky of an investment than a
bond
• Can lose EVERYTHING invested in them
• Only used by corporations, NOT governments
MAJOR AMERICAN STOCK EXCHANGES
New York Stock ExchangeNYSE
American Stock ExchangeAMEX
National Association of Securities of Dealers Automated Quotation SystemNASDAQ
NEW YORK STOCK EXCHANGE
The oldest of the major stock exchanges in this country.
Formed in 1792 to pay for Revolutionary War debt.
This a traditional stock market, where there is an actual trading floor brokers selling to one
another where physical trades can
be made.
AMERICAN STOCK EXCHANGE
Shortly after the NYSE was formed, brokers began meeting outside of the NYSE, literally on the curb and began to trade business and government securities on behalf of their clients
AMERICAN STOCK EXCHANGE
This market became known as the “Curb Exchange” which moved to its own 14 story building in Lower Manhattan
In 1953, this building became known as the American Stock Exchange (AMEX)
On December 1, 2008, the Curb Exchange building at 86 Trinity Place was closed, and the Amex Equities trading floor was moved to the NYSE Trading floor at 11 Wall Street
NASDAQ Formed in 1971
This market is not a traditional stock market
It is a securities market that is operated through a computer network
They do not have a main building nor an actual trading floor.
WHERE ARE THEY LOCATED??? Try to guess where the following stocks
are traded: IBM Macy’s Proctor and Gamble Google
FREE SHOTS… Who would you like to know?
WHY STOCK MARKETS EXIST? Major Reason #1
Investors would not be willing to buy stocks or bonds if there were no easy way to sell them at a later date Corporations would find it extremely costly to
find investors interested in buying their securities
Major Reason #2The stock markets enable us to know the
value of stocks This information is invaluable to investors who
own or are thinking of buying stocks