The Stock Market

Another way for Intel to raise funds to build a new semiconductor factory is to sell stock in the company. Stock represents ownership in a firm and is, therefore, a claim to the profits that the firm makes. For example, if Intel sells a total of 1,000,000 shares of stock, then each share represents ownership of 111,000,000 of the business The sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance. Although corporations use both equity and debt finance to raise money for new investments stocks and bonds are very different. The owner of shares of Intel stock is a part owner of Intel the owner of an Intel bond is a creditor of the corporation. If Intel is very profitable, the stock holders enjoy the benefits of these profits, whereas the bondholders get only the interest on their bonds And if Intel runs 1 into financial difficulty, the bondholders are paid what they are due before stockholders receive anything at all. Compared to bonds, stocks offer the holder both higher risk and potentially higher return After a corporation issues stock by selling shares to the public, these shares trade among stock holders on organized stock exchanges. In these transactions, the corporation itself receives no money when its stock changes hands. The most important stock exchanges in the U.S. economy are the New York Stock Exchange, the American Stock Exchange, and NASDAQ (National Association of Securities Dealers Automated Quotation system). Most of the world’s countries have their own stock exchanges on which the shares of local companies trade The prices at which shares trade on stock exchanges are determined by the supply of and demand for the stock in these companies. Because stock represents ownership in a corporation, the demand for a stock (and thus its price) reflects people’s perception of .the corporation’s future profitability When people become optimistic about a company’s future, they raise their demand for its stock and thereby bid up the price of a share of stock. Conversely, when people come to expect a company to have little profit or even losses, the price of a share falls Various stock indexes are available to monitor the overall level of stock prices. A stock index is computed as an average of a group of stock prices. The most famous stock index is the Dow Jones Industrial Average, which has been computed regularly since 1896. It is now based on the prices of the stocks of 30 major U.S. companies, such as General Motors, General Electric, Microsoft, Coca-Cola, AT&T, and IBM. Another well-known stock index is the Standard & Poor’s 500 Index, which is based on the prices of 500 major companies. Because stock prices reflect expected profitability, these stock indexes are watched closely as possible indicators of future economic conditions.

The second important characteristic of a bond is its credit risk-the probability that the borrower will fail to pay some of the interest or principal. Such a failure to pay is called a default. Borrowers can (and sometimes do) default on their loans by declaring bankruptcy. When bond buyers perceive that the probability of default is high, they demand a higher interest rate to compensate them for this risk Because the U.S. government is considered a safe credit risk, government bonds tend to pay low interest rates. By contrast, financially shaky corporations raise economy by issuing junk bonds, which pay very high interest rates. Buyers of bonds can judge credit risk by checking with various private agencies, such as Standard &Poor’s, which rate the credit risk of  different bonds .The third important characteristic of a bond is its tax treatment-the way the tax laws treat the interest earned on the bond. The interest on most bonds is taxable income so that the bond owner has to pay a portion of the interest in income taxes. By contrast, when state and local governments issue bonds, called municipal bonds, the bond owners are not required to pay federal income tax on the interest income. Because of this tax advantage, bonds issued by state and local governments pay a lower interest rate than bonds issued by corporations or the federal government.

The Stock Market

Another way for Intel to raise funds to build a new semiconductor factory is to sell stock in the company. Stock represents ownership in a firm and is, therefore, a claim to the profits that the firm makes. For example, if Intel sells a total of 1,000,000 shares of stock, then each share represents ownership of 111,000,000 of the business The sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance. Although corporations use both equity and debt finance to raise money for new investments stocks and bonds are very different. The owner of shares of Intel stock is a part owner of Intel the owner of an Intel bond is a creditor of the corporation. If Intel is very profitable, the stockholders enjoy the benefits of these profits, whereas the bondholders get only the interest on their bonds. And if Intel runs into financial difficulty, the bondholders are paid what they are due before stockholders receive anything at all. Compared to bonds, stocks offer the holder both higher risk and potentially higher return After a corporation issues stock by selling shares to the public, these shares trade among stock holders on organized stock exchanges. In these transactions, the corporation itself receives no money when its I stock changes hands. The most important stock exchanges in the U.S. economy are the New York Stock Exchange, the American Stock Exchange, and NASDAQ (National Association of Securities Dealers Automated Quotation system). Most of the world’s countries have their own stock exchanges on which the shares of local companies trade The prices at which shares trade on stock exchanges are determined by the supply of and demand for the stock in these companies. Because stock represents ownership in a corporation, the demand for a stock (and thus its price) reflects people’s perception of .the corporation’s future profitability when become optimistic about a company’s future, they raise their demand for its stock and thereby bid up the price of a share of stock. Conversely, when people come to expect a company to have little profit or even losses, the price of a share falls. Various stock indexes are available to monitor the overall level of stock prices. A stock index is computed as an average of a group of stock prices. The most famous stock index is the Dow Jones Industrial Average, which has been computed regularly since 1896. It is now based on the prices of the stocks of 30 major U.S. companies, such as General Motors, General Electric, Microsoft, Coca-Cola  AT&T, and  Another well-known stock index is the Standard & Poor’s 500 Index, which is based on the prices of 500 major companies. Because stock prices reflect expected profitability, these stock indexes are watched closely as possible indicators of future economic conditions.

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