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Business Organization, Market Structure & Investment Overview
- 1. Business Organization, Market Structure & Investment Unit 3
- 6. REVIEW Perfect Competition Monopolistic Competitive Oligopolies Monopolies
- 10. REVIEW Perfect Competition Monopolistic Competitive Oligopolies Monopolies
- 25. The Stock Market
Hinweis der Redaktion
- No single buyer or seller is large enough to affect the price of the product Buyers do not prefer one seller’s merchandise over another (no brand names nor a need to advertise) example – table salt price should not be different b/c no favorites Competition keeps prices low – buyers compete for low prices & sellers compete to get consumer’s dollar (no milk market dominance) Sellers need to keep prices low to attract customers (low prices are known to consumers) Freedom does not allow producers to remain in control of market (what happens is new firms can enter & take away business – just need a cow!) If no preferred brands & identical products then seller could not raise prices otherwise they would lose all customers Ex. Milk, wheat, corn, tomatoes, fishing, oil, cotton, commodities (NO MARKET POWER)
- PD – although the product being sold is similar from one firm to another, it is not identical (differences may be real or perceived = store location, store design, manner of payment, delivery, service) real differences = sneakers may have shock absorbent soles, high ankle support, reduced weight, pores to breath, different tread perceived = aspirin (federal law forces certain chemicals but some prefer brand names (possibly stronger??) Nonprice competition – no more price competition, advertising & promotional campaigns convince buyers product is better -if consumers think product is special, firms can raise prices so that they are above competitor’s prices -profit maximization = sell within a narrow price range but try to raise the prices within that range to maximize profit (brand loyalty)
- KEY - # of firms not as important as the ability of any single firm to cause a change in output, sales, and prices in the industry as a whole Examples – McDs / Burger King / Wendy’s or Coke / Pepsi or Domestic Automakers IB – when one firm does something, others follow b/c each firm has considerable power & influence collusion – formal agreement to set prices or cooperate price-fixing – agreeing to charge the same or similar prices (usually higher than at the normal market price) price wars – 1. firm lowers prices 2. other firms follow (series of price cuts by all producers may lead to unusually low prices in the industry (prices may be lower than costs of production)
- NO PURE MONOPOLIES! = 1. Americans tried to outlaw them, 2. easy to find close substitutes (butter & margarine, private vs. public transportation, 3. new technologies are created to compete with monopolies USUALLY TALKING ABOUT NEAR MONOPOLIES
- Natural – local telephone companies competing for one area would be wasteful, transit busses, competing gas & water companies gov’t usually gives permission to act as NM b/c they want lower costs (SO SINGLE FIRM CAN SUPPLY A GOOD/SERVICE MORE EFFICIENTLY & AT LOWER COST THAN COMPETITING FIRMS) Geographic – small gas station exists however hard to keep status if making profit OR local drugstore in area that cannot support two (if drugstore is making a lot of $$ then new store opens), stone quarry! Technological – Patent – exclusive right to manufacture, use, or sell for 17yrs Copyright – artists/authors exclusive rights to reproduce, sell, publish for 50 years plus lifetime Government – state stores, postal service, military, water, weapon manufacturing (uranium)
- Personal saving rate was 10% in 1980 while in 2005 less than 1 % 1. People save & put in a bank 2. Businesses borrow savings 3. New plants & equipment are produced 4.New jobs available (get income!) 5. New goods & service are created What do we do with our savings? Invest it! So that we can pay for education, house, car, retirement, rainy days or hard times
- Bond is like an IOU that pays interest (called a debt-related security because you are borrowing money) Buying and issuing bonds occurs in the bond markets
- U.S. gov’t bonds (Treasury bonds usually issued to borrow money for spending) – when federal gov’t needs money they issue bonds (they are always safe b/c gov’t can just print more money or raise taxes if needed to pay back the loan at maturity) CONSIDERED RISK FREE BUT ALSO HAVE LOW YIELDS (low interest rates) Savings – low-denomination ($50 – 10,000) and used for public works projects Other gov’t bonds – differ by lengths of maturity & investment amount Municipal Bonds – raise funds for public projects like building of schools, bridges, & highways Considered a little more riskier but are attractive b/c interest earned is exempt from federal income taxes & state taxes Corporate – higher risk but higher possible return on bond because of bankruptcy threat Risk of buying corporate bond varies according to financial health of the corporation
- Standard & Poor’s & Moody’s publish bond issuers’ credit ratings Financial strength – ability to make future interest payments and its ability to repay the principal when the bond matures THE HIGHER (SAFER) THE RATING THE LOWER THE INTEREST RATE! Junk bonds – may give 12% interest compared to 8% of gov’t bond
- Usually you can choose amount (low amount of $) and set the maturity date (this is great for a person who needs $ at certain time) Fixed interest rate & usually higher than a normal savings account
- Stocks are shares of ownership, not debt security like a bond IN THIS CASE, WHEN CORP. ISSUE SHARES OF STOCKS THEY ARE NOT BORROWING MONEY, RATHER THEY ARE SELLING OWNERSHIP RIGHTS People sometimes invest in non-dividend paying stocks so they expect the price of the stock to rise as the company grows, therefore making their shares worth more over time RISKIER INVESTMENT THAN BONDS USUALLY BUT DEPENDS ON THE CORPORATIONS! Dividends are in the form of a dollar amount for each share owned (the more shares the higher the dividend) – usually holders reinvest dividends to buy more shares of stock then get more dividends over time! Also, the higher the profits, the higher the dividend! Not all companies issue dividends. Many use profits to reinvest in business, so people who invest in the non-dividend paying stocks are looking for capital gains
- A lot of times have minimum # of shares to buy, and sell at a Net Asset Value (NAV) - The Net Asset Value (NAV) is the current price of a mutual fund, which is calculated at the end of each business day. It is the total value of the fund's assets minus its liabilities and divided by the total number of shares outstanding. It is similar to a stock's closing price for the day. Stock or bond (debt-related) mutual funds where there is a collection of securities chosen & managed by a group of professional fund managers Shares are bought & sold just like a stock Diversification – investing in wide variety of financial assets so as to reduce the risk of poor performance of one Each mutual fund has different goals – stock funds for growth & income from dividends & value appreciation while bond funds offer lower risks & money market funds are short term with higher interest rates than savings accounts but no FDIC insurance Compare funds to market index like S&P or Dow, if not getting same returns then may be not managed well enough
- Capital vs. Money Market – capital is money lent for periods longer than a year and money market is less than a year Primary vs. Secondary Market – primary is not transferrable (can’t be sold off if needing money like savings bond) and secondary can be traded
- Young person saving for retirement can lose more than someone who is already retired (has more time to recover)
- “ Don’t put all of your eggs in one basket” = too great of a risk to only get one type of investment or put all money in one company with same maturity The goal is to reduce the risk of investing while still earning good retunrs
- A brokerage is a company that buys & sells stocks & bonds for investors (brokers help investors to make & carry out their investment decisions)
- lists the shares of more than 3,000 large companies, and has 1,400 seats or memberships with access to the trading floor. What is a Blue Chip stock? It is the stock of a large company that has a long history of stable operation and solid stock performance. A great example is General Electric.
- National Association of Securities Dealers Automated Quotation (many new high tech companies that usually do not pay dividends) Nasdaq is still today sometimes called an OTC market, but has become more of an organized exchange over time Investors buy directly from dealer/broker who searches for other dealers/brokers on the OTC market for the best price
- Federal agency created during Great Depression Makes sure firms release info in legal document, known as prospectus, that help investors to make informed decisions about whether to buy or sell What is the SEC? The Securities and Exchange Commission (SEC) is the government agency responsible for protecting investors by monitoring and regulating brokers, dealers, and the stock and bond markets in the U.S. They also make sure publicly-traded companies disclose the required business details to the public.
- Sometimes trade after seconds or minutes!
- Futures – buy at a price today but receive commodities or assets in the future (grain & livestock exchanges), person selling is betting price will go lower while buyer thinks price will go higher, each must pay each other for changes in value Options – difference is that someone can back out of the agreement (not an obligation) usually 3-6 month options call – right to buy a share of stock at a specified price some time in the future put – right to sell a share of stock at a specified price some time in the future ex. Call – pay $2.50 per share for option, gives right to purchase 100 shares of stock at $70 during a specified period of time(right now its at $65), if price drops to $30 then tear up option, buy for cheaper but if stock price goes up to $100 purchase stock at $70 ex. Put - $2.50 per share for option, right to sell at $50 (currently at $55), if stock price drops can require to sell at $50, if higher then tear up and sell at higher price
- What determines a stock's price? There are many factors that play into a stock's price. Overall, though, the price is determined by investors' perceptions of what the stock is worth. Important factors – how many shares are there? (small amount but profitable then worth more, if small & less profitable then shares are worth less) also expectations (if two companies are = but one has better future prospects then price is higher) Some of the biggest factors include: How big and successful the company is (especially its earnings) Recent company news The state of the U.S. and world economies Whether there is a bull or bear market World events, whether good or bad
- When people say “The stock market rose today”…. A market index measures the change in value of a group of stocks, bonds, or other investments compared to a specific starting point What is the Dow Jones or the DJIA? The Dow Jones Industrial Average (often referred to as the "Dow") is an averaged number representing the values of 30 U.S. "blue-chip" stocks. The DJIA is the most well-known market indicator in the world and was created in 1896 by Dow Jones & Company, which is actually a publicly-traded company (DJ) on the New York Stock Exchange (NYSE). They produce many important business publications including The Wall Street Journal, Barron's, and several stock indexes. Started with only closing price of 11-12 stocks What is the S&P 500? The S&P 500 is a stock index published by Standard & Poor's. It measures 500 U.S. stocks that are supposed to be representative of the overall stock market (choose stocks that represent certain industries as components of the economy). It was created in 1957. uses NYSE, AMEX, & OTC
- Bull markets are good & have been most prevalent over bear market