Chapter 7 and 8 Study Guide

Forms of Business Ownership

• Sole Proprietorship
• A business firm that has one owner
• Advantages
• Freedom to enter the market easily
• Freedom from outside control
• Freedom to retain information
• Freedom from paying excessive taxes
• Freedom from being an employee
• Disadvantages
• Unlimited personal financial liability
• Limited management employee skills
• Limited lifespan of the business
• Limited availability
Forms of Business Ownership
• Partnership
• A business with two or more persons as the owners
• Advantages
• Greater management skills
• Greater retention of competent employees
• Greater sources of financing
• Ease of formation and freedom to manage
• Disadvantages
• Unlimited personal financial liability
• Uncertain lifespan of the company
• Conflicts between partners (Owners)
Forms of Business Ownership
• Incorporation
• Legally declaring that the business is separate from the owners
• Ownership of a corporation
• Stock
• A person becomes part owner of a corporation by buying shares of its stock
• Advantages of a corporation
• Limited personal financial liability of stockholders
• Experienced management and specialized employees
• Continuous life
• Ease in raising financial capital
Forms of business ownership
• Disadvantages of a corporation
• Higher taxes
• Greater governmental regulation
• Lack of secrecy
• Impersonality
• Rigidity
Stock Market
• Stock
• Portions of a corporation
• Can help individuals build wealth
• Types of stock
• Common stock
• Represents true ownership of the firm
• Dividends
• Distribution of a portion of the corporation’s profits
• Preferred Stock
• Receive dividends before common shareholders
• Do not have actual ownership in the business
• Selling Stock
• Initial public offering (IPO)
• The first offering of stock the public by a corporation
• Helps the company raise capital quickly by selling ownership in the company
Stock Market
• Buying Stock
• Individuals want to make a profit and receive dividends
• Early Market Development
• Stock Exchange
• Began in Great Britain around the 1700’s
• Organization
• Brings together buyers and sellers of stocks
• Expectations of future earnings drives then demand up which drives up the
price
• Examples
• New York Stock Exchange
• Most well-known and reputable stock market in the world
• NASDAQ
• Largest exchange that doesn’t have a trading floor
• The market operates electronically
Stock Market
• Stock Indices
• Stock Index
• Group of stocks that indicate the health of the overall market
• Examples
• Dow Jones Industrial average
• Prices of 30 stocks that are considered leaders of their industry
• Stand and Poor’s 500
• Includes 500 top stocks and gives a broader view than the Dow Jones industrial
• Past problems and present safeguards
• Speculation
• Buying and selling stocks in the short term in hopes of making a large profit
• Speculative bubble
• When stocks rise in excess of a corporations true value
• Eventually the bubble bursts and everything comes crashing down
• SEC
• Security Exchanges Committee
• Formed in 1934
• Regulating government body that promotes fair trade on the stock and exchange market