Buying and Selling Stocks and Bonds Capital Money

Buying and Selling Stocks and Bonds

Capital • Money is needed for the day-to-day operations of a corporation. • Internal and external sources • Internal funds: Those earned by the corporation in the course of business. • Mostly used to pay the corporation’s expenses.

Capital • One of a corporation’s most important items of expense is depreciation. • The money that a corporation sets aside to replace its old or out-of-date equipment. • Money sums that remain represent profit. • A corporation DOES NOT have to pay all of its profits to its shareholders. • Profits not paid out are an important source of business funds.

Capital • External funds: Those that come from individuals and institutions outside of the corporation. • • Bank loans Mortgages Trade credit: Delays in payment that firms grant to business customers. Stocks and bonds

Corporate Securities • Sets the corporation apart from sole proprietorship or partnership. • Corporations have a legal to sell its securities. • Stocks and bonds • Stocks represent ownership in corporations. • Bonds represent loans to corporations.

Stock Exchange • Corporations wanting to raise money by selling shares of stock usually do so through investment banks. • Businesses that help corporations sell their stock to the public. • Stock exchange: Marketplaces in which the stocks of certain corporations can be bought and sold.

Why do people buy corporate stocks? • Yearly income • Investment: Buying stock in the hopes the value will increase over time. • Long term • Anything that makes the company seem more attractive will cause a rise in the price of stock. • CAPITAL GAIN: Selling at a profit. • Speculation: Those who hope to profit by correctly predicting shortterm fluctuations in the value of stocks and bonds.

Mutual Funds • A company that invests on behalf of its shareholders. • People purchase shares of the mutual fund, and the company pools the money of all these people, then invests the pooled money in a VARIETY of securities, including stocks, corporate bonds, and government bonds. • Diversifying investment

Advantages of Mutual Funds • Professional management • Diversification: Investment in a wide variety of stocks/bonds • Liquidity: Can be turned in cash quickly and easily

Disadvantages of Mutual Funds • Not free from risk • If stocks, in general, do poorly, so will mutual funds. • Some mutual fund companies are poorly managed.

Protection in the Sale of Securities • Securities and Exchange Commission (SEC) • Regulate the sale of securities • Security Investor Protection Corporation (SIPC) • Insures the cash and securities in customer accounts in the event that a brokerage firm were to fail. • State governments also regulate securities