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Understanding Stock Investment and Corporations
Oct 2, 2024
Lecture Notes: Understanding Stock Investment and the Role of Corporations
Introduction
Description of a typical American family: John Q Public.
Highlights of their lifestyle: new car, long-term mortgage, leisure time, and savings for emergencies.
The Concept of Stock
Definition of Common Stock
: Shares representing ownership in a corporation.
Importance of stock as an investment tool.
Case Study: Oil Drum Manufacturing Corporation
Owner's Challenge
: Increased demand for oil drums leads to the need for additional capital (approx. $3 million).
Formation of a Corporation
:
Owner applies for a corporate charter and permission to sell shares.
Engages an investment banker to help raise capital.
Securities and Exchange Commission (SEC) Registration
Registration Process
:
Required before shares can be sold.
Ensures truthful disclosure of information to the public, but does not imply approval of the investment by the government.
Selling Common Stock
Investment banker pays the owner for shares in exchange for capital.
Proceeds used to build a new plant for increased production.
Ownership Benefits
: Stockholders own shares in the corporation's assets and elect the board of directors.
Demand for More Capital
As demand grows, the corporation needs to raise more funds (approx. $20 million).
Decision to list on the New York Stock Exchange (NYSE) for broader access to capital.
Listing on the New York Stock Exchange
Criteria for Listing
:
Substantial assets, wide distribution of shares, successful management, and earnings of at least $1 million.
Compliance with federal, state, and NYSE regulations.
Examination by the stock list department before approval.
Trading Process on the NYSE
Stock Transactions
: Example of a buyer in Colorado and a seller in Maine.
Execution of buy and sell orders through brokers on the NYSE floor, highlighting round lots (100 shares) and odd lots (less than 100).
Economic Impact of Investments
Historical context of savings financing growth in various industries (transportation, communication, etc.).
The role of industrial expansion in creating jobs and contributing to national security.
Importance of Common Stock
: Investment in American industry equals investment in the future of the nation.
Conclusion
Caution for Investors
:
Acknowledgement of risks in stock investment.
Importance of gathering information before making investment decisions.
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