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.