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.