Intro Flashcards
Financial Market definition
Environment (physical or virtual) where demand and supply of capital meet and trade and the unit of trade is a security
How can Financial Markets be classified
- instruments traded (Derivatives , currency)
- type of trading (Stock Market, OTC)
3 main business structures
Sole Proprietorship
Partnership
Corporation
Discuss the Sole Proprietorship business structure
Business owned by one person who keeps all profits and has unlimited liability
Advantages: Easy to setup, easy control, easy to dissolve, profits are personal income
Disadvantages: Unlimited liability for debts, difficult to transfer ownership
Discuss the Partnership business structure
Business owned by two or more partners
Advantages of partnership vs. sole proprietorship
limited protection of owners’ personal assets.
owners’ limited liability for firm obligations.
more sources of equity.
more sources of expertise
Disadvantages of Partnership vs. sole proprietorship
shared control - Moral Hazard: private benefits.
shared profit - Moral Hazard: effort incentives.
harder to dissolve.
Discuss the Corporation business structure
Owned by more than one person, typically as joint stock company
Can be publicly listed or private
Advantages of the Corporation business structure
Individual entity, limited liability, unlimited
life span, transferable ownership, ownership is separated
from management.
disadvantages of the Corporation business structure
Double taxation, slightly complicated to
setup, ownership is separated from management.
Definition: Common stock
Represent ownership shares in a corporation
Each share of common stock entitles its owner to one vote at the corporation’s annual general meeting (AGM) as well as to
a share in the financial benefits of ownership
Book value of (common) equity
Value of a company according to its balance sheet
Market value of (common) equity
Market price of one share of company’s common stock being traded times the number of common shares outstanding
Intrinsic value of equity
Is the true value of equity based on a valuation model
