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More than 75 percent of businesses in the United States are proprietorships, yet they account for less than 7 percent of total revenues received by private businesses.
In many areas of economic activity, including much of manufacturing, the most efficient, lower cost firms are rather large, often with many millions of dollars of capital.
Corporations are the most dominant form of business enterprise in the United States. Fewer than 20 percent of firms are corporations, but they account for almost 90 percent of all revenues generated by private sector businesses.
Corporations tend to be substantially larger than either proprietorships or partnerships.
If managers fail to earn as high a rate of return as informed stockholders believe possible, the stockholders may revolt and seek a new set of executives.
Failure to earn a normal rate of return can also endanger the continued existence of a firm, for if it fails for long enough, a firm will be forced into bankruptcy and reorganization.
Finally, a satisfactory profit is essential for continued expansion of the firm. Profits provide funds for expansion and make it easier to acquire additional capital.
The owners of corporations own shares of stock in the company and are called stockholders.
Each stockholder's ownership of the corporation and voting rights in the selection of corporate management is proportionate to the number of shares owned.
Preferred stock Owners receive a fixed regular dividend
payment; the payment remains the same regardless of the profits of the corporation.
No dividends can generally be paid to holders of common stock until the preferred stockholders receive a specified fixed amount per share of stock, assuming that funds are available after the debts of the corporation are paid.
Owners of common stock assume greater risks than preferred stockholders, doing so because the potential rewards are then greater if the company is in fact successful.
Individuals as well as institutions such as insurance companies, pension funds, mutual funds, trust departments of banks, and university and foundation endowment funds, all hold corporate stocks.
General Motors, IBM, and Microsoft have millions of individual stockholders.
Indirectly, millions more are involved in stocks through their interest in mutual funds, ownership of life insurance, vested rights in private pension funds, and so on.
The obligation to bondholders is of higher legal priority than that of stockholders. Before any dividends can be paid, even to
owners of preferred stock, the interest obligations to bondholders must be met.
If a company is liquidated, bondholders must be paid in full the face value of their bond holding before any disbursements can be made to stockholders.
Bondholders have greater financial security than stockholders, but receive a fixed annual interest payment, with no possibility to receive increased payments as the company prospers.
The possibility of the value of a bond increasing greatly—a capital gain—is limited compared to that of stocks.
A company can get finances through plowbacks or reinvestment.
Instead of using their profits to pay out dividends, a firm might take some of its profits and plow it back into the company for new capital equipment.
Expected corporate earnings, business conditions, the economic policies of the government, business conditions in foreign countries, and concern over inflation all influence the price of stocks (and, to a lesser extent, bonds).
During periods of rising securities markets, optimism is generally great, and businesses are more likely to invest in new capital equipment, perhaps financing it by selling new shares of stock at current high prices.
During periods of pessimism, stock prices fall, and businesses reduce expenditures on new capital equipment, partly because financing such equipment by stock sales is more costly.
More shares have to be sold to get a given amount of cash, seriously diluting the ownership interest of existing stockholders.
Hot tips are only hot if you are one of only a few to know if a company's stock is going to rise.
Once that news hits the street, it will cease to be a source of profit.
In sum, if markets are operating efficiently, the current stock prices will reflect all available information, and consistent, extraordinary profit opportunities will not exist.
Many financial analysts think that the best stock market strategy is to diversify, buying several different stocks, and holding them for long periods. You don't have to continue to pay
commissions on additional trades. The stock market has historically
Most newspapers (and many Web sites) have a financial section that covers the prices of stocks so investors can have some of the information that they need to make their decisions to buy and sell stocks.
Some investors watch this data by the second as they are trading in and out of stocks a number of times during the day.
At the other extreme, some investors pick a good company and hold the stock for a long time hoping that it will give them a better return than other assets, like saving accounts.