BZORG Unit 3

What is a mutual fund? What is an exchange-traded fund (ETF)?

A professionally managed investment vehicle that combines and invest the funds of many individual investors Generally invest in the stocks or other securities contained in a specific stock or securities index.

What is a partnership?

A voluntary association of two or more persons to act as co owners of a business for profits

What is a corporate bond? What is a debenture bond?

A written pledge that will repay a specified amount of money with interest. o A bond that is backed by the reputation of the issuing corporations.

What is meant by "selling short"? How does an investor benefit from this type of transaction?

An investor borrows a security and sells it on the open market, planning to buy it back later for less money (Investopedia) Assuming that the stock is overvalued and will soon decrease in price, the investor intends to repay the brokerage firm later with less costly stock, resulting in profit for the investor.

What type of information should be included in the articles of partnership, and why is this document important?

Articles of partnership refers to an agreement Listing and explaining the terms of the partnership. Although both Oral and Written partnership agreement are legal and can be enforced in the court's written has an advantages o Things that ▪ Names of Partners ▪ Nature,Name, and address of business ▪ Duration of partnership ▪ Contributions of Capital ▪ Duties of each partner ▪ Salaries, withdrawals, and distribution of profits ▪ Termination ▪ Signatures ▪ Dates of everything

What is meant by "buying on margin"? Why is this considered a high-risk technique? Who sets the margin requirement?

Buying stock by borrowing part of the purchase price, usually from a stock brokerage firm

What is meant by "buying long"? How does an investor benefit from this type of transaction?

Buying stocks expected to increase in value, which can then be sold at a profit

What are some uses for short-term financing?

Cash flow problems, current inventory needs, speculative production, monthly expenses, shortterm promotional needs, unexpected emergencies

What is meant by a domestic corporation? A foreign corporation? An alien corporation?

Domestic a corporation in the state in which it is incorporated o Foreign a corporation in any state in which it does business except the one in which it is incorporated o Alien a corporation chartered by a foreign government and conducting business in the United States

What are the steps in effective financial planning?

Establish organizational goals o Budget money needed to meet goals o Identify sources of funds

What is the difference between a general partner and a limited partner?

General Partner is a person who assumes full or shared responsibility for operating a business and Limited Partner is a person who contributes capital to a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership

What is a horizontal merger? A vertical merger? A conglomerate merger? Give an example of each.

Horizontal Merger is is a merger between firms that make and sell similar products or services in similar markets ▪ Ex. Pharmaceuticals+Pharmaceuticals o Vertical merger is a merger between firm that operate at difficult but related levels in the production and marketing of a product. ▪ Ex. Computers & Technology + Automated Software o Conglomerate Mergers takes place between firms in completely different industries. ▪ Ex. Financial Conglomerate + Railroad and Transportation

What is convertible preferred stock?

It is an option for the holder to change their shares to common shares in the company.

What is an initial public offering?

It is when a corporation sell stock to the general public for the first time.

What is the purpose of a personal budget?

It lists your assets and liabilities on a specific date o The purpose is to get a better picture of your financial conditions

What is meant by "full disclosure" with regard to regulation of securities trading?

It means that investors should have access to all important facts about stocks, bonds, and other securities so that they can make informed decisions.

What is the difference between a market order and a limit order when buying or selling stocks?

Market order A request that a security be purchased or sold at the current market price Limit Order A request that a security be bought or sold at price that is equal to or better than some specified price

How is the share value for a mutual fund determined?

Net Asset Value Current market value of a mutual fund's portfolio minus the mutual funds liabilities and divided by the number of outstanding shares

How do you determine an individual's net worth?

Net worth is the difference between the value of your total assets and your total liabilities

What is a not-for-profit corporation?

NotforProfit corporation is is a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit. Various charities, museums, private schools, colleges, and charitable organization are organized in this way, primarily to ensure limited liability.

Why is real estate often considered to be a good investment? What are some of the risks associated with investing in real estate that should be considered?

One of the best hedges against inflation (value rises as general price of goods increases)

What are the three ways that investors can make money by buying common stock?

Profit when they receive dividends, when the dollar of their stock appreciates, and when the stocks split and increase in value.

What are the primary sources of funds available to a business? Which source of funds is considered to be the last resort for a corporation to use?

Sales revenue, equity capital, debt capital, and proceeds from sale of assets o Selling assets is the last resort.

Differentiate between an S-corporation and a limited liability company (LLC), and explain why a business would choose one of these forms of ownership over a conventional corporation.

Scorporation a corporation that is taxed as if it is a partnership ▪ cheaper to maintain because there are cheaper taxes o LLC a form of business ownership that combines the benefits of a corporation and a partnership while avoiding some of the restrictions and disadvantages of those forms of ownership ▪ avoids the restrictions, also not restricted to 100 stockholders like Scorporation

What is a sole proprietorship?

Sole proprietorship is a business that owned and usually operated by one person

What is meant by the term "speculative production," and how might it impact cash flow?

Speculative production refers to the time lag between the actual production of goods and when the goods are sold. o Impact on cash flow: cash flow will be mostly out of the company during production of a product, it will be into the company when the product is being sold

What do stock dividends represent?

The dividend on a share of preferred stock is stated on the stock certificate either as the percent of the par value of the stock or as a specified dollar amount.

How does a business determine in which state to incorporate?

They can incorporate in any state which it chooses to, most corporations choose to incorporate in the state in which they do the most business o factors that affect decisions: ▪ the cost of incorporating in one state compared to another state ▪ the advantages and disadvantages of each state's corporate laws and tax structure

Why might someone develop a personal investment program?

They value of their money will grow after 20 to 40 years so they will make a lot of money for retirement.

What is a corporation?

an artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts.an artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts.

What is a cooperative, and what major advantages does it provide?

an association of individuals or firms whose purpose is to perform some business function for its members o Advantages: ▪ can perform function more effectively than any member on its own ● lower costs of units because they are bought in bulk then distributed

What are some traditional investment alternatives? Rate them on the basis of safety from the most conservative to the least conservative (i.e. least risky to most risky).

bank accounts government bonds common stocks preffered stock mutual fund

What is a budget? What is the difference between a cash budget and a capital budget?

budget: financial statement that projects income, expenditures, or both over a specified future period o cash budget: estimates cash receipts and cash expenditures over a specified time period o capital budget: estimates a firm's expenditures for major assets, equipment, and mergers and acquisitions

What are some uses of long-term financing?

business startup costs, mergers and acquisitions, new product development, longterm marketing activities, replacement of equipment, expansion of facilities

What is mean by the term "cash flow"? What is the ideal recommendation for what a firm should have with regard to cash flow for its business?

cash flow: movement of money into and out of an organization o Ideal recommendation is to have sufficient money coming into the firm in any period to cover the firm's expenses during that period.

What is meant by the term "double taxation"?

corporations must pay tax on their profits and the stockholders must pay personal income tax on profits received as dividends; therefore the corporation's profits are taxed twice

What is the difference between debt capital and equity capital?

debt capital: borrowed money; may be borrowed for either short or longterm use o equity capital: ▪ sole proprietorship & partnership equity capital is provided by the owner(s) of the business ▪ corporation equity capital is money obtained from the sale of shares of ownership in the business

What are the key advantages of a partnership?

good Ease of StartUp Availability of Capital and Credit Personal Interest Combined Business Skills and Knowledge Retention of Profits bad No Special Taxes Unlimited Liability Management Disagreement Lack of Continuity Frozen Investment

What are the key advantages and disadvantages of a sole proprietorship?

good Ease to startUp Pride of Ownership Retention of all Profits No Special Taxes Flexibility of being your own boss bad Unlimited Liability Lack of Continuity Lack Of Money Limited Management Skills Difficulty in Hiring Employees

What is meant by "liquidity," and why must it be considered in an investment program?

how easy it is to buy or sell something the ability you have to convert any asset into cash quickly. It is also an ability to buy or sell a security without affecting the asset's price.

How do your age and the time factor work into investment decisions?

investing for the long term or the short term based on when money will be needed Age - Growth oriented investments for young investors versus conservative investments for older investors

What is a bond indenture?

legal document that details all the conditions relating to a bond issue

What is the prime interest rate? (definition of term, not the current percentage rate)

lowest rate charged by a bank for a shortterm loan

What is a security average (or security index), and what purpose does it serve for investors?

measure the growth of value of a set of securities.

How do you calculate return on investment (ROI)?

net profit/total investment + 100

What are some things to consider with regard to goals and objectives in a personal investment program?

pay yourself first look into getting a retirement plan like a 401k save every month take advantage of gifts, inheritances etc.

What is the difference between the primary market and the secondary market?

primary market: market in which an investor purchases financial securities (via an investment bank) directly from the issuer of the securities o secondary market: market for existing financial securities that are traded between investors

What is the risk-return ratio?

riskreturn ratio: ratio based on the principle that a highrisk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns o High risk decision = high financial return

What are some examples of the types of firms in which venture capitalists tend to invest?

small (and sometimes struggling) firms that have the potential to become successful

What is meant by "asset allocation"? What is its purpose in portfolio management?

spreading your money among several different types of investments to lessen risk

What is a sinking fund?

sum of money to which deposits are made each year for the purpose of redeeming a bond

What does the maturity date of a bond represent?

the date on which a corporation is to repay borrowed money

What is trade credit?

trade credit: a type of shortterm financing extended by a seller who does not require immediate payment after delivery of merchandise

How is a traditional budget developed? How is zero-base budgeting formulated?

traditional budget: each new budget is based on the dollar amounts contained in the budget for the preceding year. The amounts are modified to reflect any revised goals, and managers are required to justify only new expenditures. zerobased budgeting: budgeting approach in which every expense in every budget must be justified