Proprietorship
An unincorporated business owned by one individual
Easily and inexpensively formed, few government regulations, not subject to corporate taxation
Advantages of a proprietorship
Difficult to obtain capital, unlimited personal liability, limited to life of its founder
Limitations of a proprietorship
Partnership
Exists whenever two or more persons or entities associate to conduct a noncorporate business for profit
Limited Partnership
wherein certain partners are designated general partners and other limited partners
Limited Partners
In a limited partnership, can lose only the amount of their investment in the partnership, but typically have no control
General Partners
In a limited partnership, have unlimited liability and typically control rests solely with
Limited Liability Partnership (or limited liability company)
All partners enjoy limited liability with regard to the business's liabilities, and their potential losses are limited to their investments in the business
Corporation
A legal entity created under state laws, and it is separate and distinct from its owners and managers.
Unlimited life, easy transferability of ownership inters, limited liability
Advantages of a corporation
Double taxation, complex to set up
Disadvantages of a corporation
Charter
Includes information such as the name of the proposed corporation, types of activities it will pursue, amount of capital stock, number of directors, and names and addresses of directors
Bylaws
A set of rules drawn up by the founders of the corporation
Professional Corporation (or professional association)
Has most of the benefits of incorporation but the participants are not relieved of professional (malpractice) liability
S Corporations
A small corporation that, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization
Initial Public Offering
Occurs when a closely held corporation or its principal stockholders sell stock to the public at large
Agency Problem
Occurs when mangers act in their own best interests, rather than in the best interests of the stockholder/owners
Corporate Governance
The set of rules that control a company's behavior toward its directors, managers, employees, shareholders, creditors, customers, competitors, and community
Market Price
The stock price that we observe in the financial markets
Intrinsic/Fundamental Price
The market price when it reflects all relevant information
Free Cash Flows (FCF)
The cash flow actually available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations
Weighted Average Cost of Capital
The rate of return required by investors
Investment Banking House
Organization in which indirect transfers of securities may go through, these organizations underwrite the issue and basically serves as a middleman and facilitates the issuance of securities
Financial Intermediary
Middle Man that buys securities with funds that it obtains by issuing its own securities. An example is a common stock mutual fund that buys common stocks with funds obtained by issuing shares in the mutual fund
Capital Market Security
Debt that matures in more than a year
Money Market Security
Debt that matures in less than a year
Equity Instruments
A claim upon a residual value
Derivatives
Claims whose value depends on what happens to the value of some other asset. Futures and option are two important types, and their values depend on what happens to the prices of other assets. Therefore, the value of these securities comes from the value o
Securitization
A process in which some securities are created from packages of other securities
Savings and Loan Associations (S&Ls)
Organization that at one time made most mortgages, took in the vast majority of their deposits from individuals in nearby neighborhoods, pooled these deposits and then lent money to others in the neighborhood in the form of fixed-rate mortgages
Interest Rate
The rate users pay providers for debt
Cost of Equity
The rate users pay providers for equity
Production Opportunities, Time Preferences For Consumption, Risk, Inflation
Four most fundamental factors affecting the cost of money
Country Risk
The risk that arises from investing or doing business in a particular country and it depends on the country's economic , political, and social environment
Exchange Rate Risk
Risk associated with the value of an investment depending on what happens to exchange rates
Mutual Savings Banks (MSBs)
Operate similiar to S&Ls, mostly in northeastern states
Credit unions
Cooperative associations whose members have a common bond, which loans members' savings only to other members
Commercial Banks
raise funds from depositors and issue stock and bonds to investors
Mutual Funds
Corporations that accept money from savers and then use these funds to buy financial instruments, they pool funds which allows them to reduce risks by diversification and achieve economies of scale in analyzing securities, managing portfolios, and buying/
Money Market Funds
Invest in short term, low risk securities, such as Treasury bills and commercial paper
Exchange Traded Fund (ETF)
Allows investors to sell their share in a mutual fund at any time during normal trading hours, usually have very low management expenses and are rapidly gaining in popularity
Hedge Funds
Raise money from investors and engage in a variety of investment activities, limited to institutional investors and a relatively small number of high net worth individuals
Private Equity Funds
Similar to hedge finds in that they are limited to a relatively small number of large investors, but they differ in that they own stock in other companies and often control those companies, whereas hedge funds usually own many different types of securitie
Life Insurance Companies
Take premiums, invest these funds in stocks, bonds, real estate, and mortgages, and them make payments to beneficiaries
Pension Funds
Retirement plans funded by corporations or government agencies, invest primarily in bonds, stocks, mortgages, hedge funds, private equity, and real estate
Financial Markets
Bring together people and organizations needing money with those having surplus funds
Physical Asset Market
markets for such products as wheat, autos, real estate and machinery
Financial Asset Markets
markets that deal with stocks, bonds, notes, and other financial instruments
Spot Markets
markets where assets are being bought or sold for "on-the-spot
Future Markets
Markets where assets are bought and sold and delivered on some future date
Money Markets
Markets for short term highly liquid debt securities
Capital Markets
Markets for corporate stocks and debt maturing more than a year in the future
Mortgage Markets
Markets dealing with loans on residential agricultural commercial and industrial real estate
Consumer Credit Markets
Markets involving loans for autos, appliances, education, vacation, etc
Primary Markets
Markets in which corporations raise new capital
Secondary Markets
Markets in which existing, already outstanding securities are traded among investors
Private Markets
Markets where transactions are worked out directly between two parties
Public Markets
Markets where standardized contracts are traded on organized exchanges
auction
example is the CBOT where traders meet in a pit and sellers and buyers communicate with one another through shouts and hand signals
Dealer markets
Markets where market makers keep an inventory of the stock in much the same way that any merchant keeps and inventory, they then list bid and ask quotes which are the prices at which they are willing to buy or sell
Electronic Communications Network (ECN)
participants post their orders to buy and sell and this automatically matches orders
Seasoned Equity Offering
when a company decides to sell additional shares to raise new equity after the IPO, this is still a primary market
National Association of Securities Dealers (NASD)
a self regulatory body that licenses brokers and oversees trading practices