Business Types and Investment Decisions

Business Types and Investment Decisions

• Business Types • Investment types

What kind of business?

Mark’s business is a small firm that designs websites. He has three employees and is the CEO and CFO of the company. He spends most of his evenings keeping on top of the bookkeeping and completing paperwork. His profits and losses appear on his personal tax returns.


Jess and Julie open their very own interior decorating business. Julie is the artistic one and she does most of the design work. Jess controls the finance portion of the company. They share the profits and losses which appear on their personal income taxes.


Mark, Matt, and Michael start their very own software company (look out Bill Gates). They are each involved in the daily operations of the business and also have an annual stockholders meeting to determine basic long term strategy for the firm. The profits from the business are paid out in the form of dividends are taxes as capital gains.


Chris opens his own business with the help of investment from his Uncle. His Uncle is very busy with his own job and only participates in the company at quarterly meetings. The profits from the business are recorded on their personal income taxes.

Strengths and Weaknesses of Business Types What kind of business organization would you

choose for each of the following scenarios? Why?– You are about to open your very own pizza shop. You

were able to secure a line of credit from a local bank to start.

– You and your friends have come up with the next “Big Idea” in the internet craze…online car washing service. You know its going to be a big smash and now all you need to do is raise the capital to start.

What is the best choice?

– Your brother comes to you with a brilliant idea to start a business and you want to help him out and invest but you do not want to give up the financial security of your current job or possibly loose your house.

– You just graduated from law school and you are looking to go out on your own.

What is the best choice?

You started a small company in your business several years ago to make some extra money on the side. You have been very successful and now there are several individuals interested in investing with you.

Why Do People Invest Brainstorm

What are some reasons people invest?What are people looking for in their

investments?

Investment Types and Terms

Stock- ownership pieces of the firm Dividend- a portion of corporate earnings

paid out for each share of stock Common Stock- basic ownership of

corporation; has board voting rights; no guarantee of dividends


Preferred Stock- non-voting ownership often with guarantee of dividends; receives dividends before common stockholders; receives payment first before common stock holds if company is dissolved

Proxy- ballot that gives stock voting rights to a representative

Bond- A promissory note


Horizontal Merger- Firms producing similar products combine (same basic process)

Vertical Merger- Firms performing different steps along the production chain integrate

Conglomerate- Firm that has at least four business, each making a different product with none of these responsible for a majority of sales


Multinational Corporation- A corporation with manufacturing of service operations in several countries

Nonprofit Organization- Business-like operations without profit as the main goal; seek to improve well-being

SRI- Socially Responsible Investment – gives back to the community or world at large in some way

Risk and Return

People want to be rewarded for accepting the possibility they may lose their initial investment

Depending on the type of person, some people may be less comfortable with this risk – Older individuals tend to seek more secure

investments – Younger individuals tend to look for greater rewards – Why?

Bonds

Used to raise capital for companies, municipalities, and governments

Loans that pay interest in periodic payments

At the end of the agreed upon term, the full amount of the loan is repaid

Parts to a Bond

Par Value- the amount the bond is originally worth (the amount of money the issuer receives)

Coupon Rate- the interest rate that will be paid on the bond

Maturity- length of the bond Schedule for payment- how often will the

bond pay interest to the holder

Bond Markets

Bonds can be bought and sold between individuals after their initial sale– May not pay the actual coupon rate for the

bonds – Why might the price of the bond change over

time?• Inflation• Change in interest rates• Change in the financial situation of the company

(increase in risk)

Bond Markets

Bond Ratings- a system that rates the risk of all bonds– AAA is the best

• Very safe • US treasury bond

– BB/Ba and below are considered Junk Bonds • Riskier because companies have no other way to

raise capital due to bad credit

Bond Markets

Depending on the rating of the bond people will be willing to pay different prices

Current Yield– Annual interest/ purchase price – This tells the investor what the actual return is

on their bond if they do not pay par value

Types of Bonds

Corporate- bonds issued by companies to raise capital

Municipal- (Munis) issued by state and local governments to finance projects

Government Savings Bond-bought at a discount from their redemption rate and do not pay interest annually

Types of Bonds

International Bonds- corporations selling bonds from outside the US

Treasury Notes- Gov. obligations between 2-10 years

Treasury Bond- gov. obligations of 10-30 years

Treasury Bills- Gov obligation up to 1 year and a min of 10,000

Types of Markets

Capital Markets- money is loaned for periods of more than one year

Money Market- money is loaned for less than one year

Primary Market- Initial Issue is the only one that would redeem the asset – Non transferable

Secondary market- existing securities can be resold to new owners

Stock Market Basics

Listing on the Stock Market – Very Regulated – Requirements must be met and fees must be

paid to list – SEC (Securities and Exchange Commission) is

the governing body

The SEC

What is buying on margin?Why do we have the securities and

exchange commission today?If you were to set up ways to keep a Black

Tuesday from occurring again, What would you do?

Stock Market Basics

What are the benefits of being listed– Initial Public Offering- First time stock is sold – Ease of raising capital – Prestige

Reading Stock Quotes

Large amount of information in the stock sections

52 week hi/ low– Lists the highest and lowest prices in a 52

week period – Gives you an idea of the range a stock price

fluctuates between in the past year


Financials and RatiosALL COMPANIES THAT ARE TRADED

PUBLICLY MUST REPORT FINANCIALS

These list total sales, net income/loss, dividend payouts and much much more.


Ratios are a tool used by investors and companies to help break down financial data into quick reference numbers

Price to Earnings Ratio (P/E)-current price of stock/company earnings per share– A higher P/E USUALLY means that investors

expect HIGHER earnings

Reading Stock Prices

www.zacks.comInvesting Prospectus

– http://www.zacks.com/ZER/rd_get_pdf.php?r=APD

Economy & Finance

Business Types and Investment Decisions