Key Concepts and Summary

Companies can raise early-stage financial capital in several ways: from their owners’ or managers’ personal savings, or credit cards and from private investors like angel investors and venture capital firms.

A bond is a financial contract through which a borrower agrees to repay the amount that was borrowed. A bond specifies an amount that will be borrowed, the amounts that will be repaid over time based on the interest rate when the bond is issued, and the time until repayment. Corporate bonds are issued by firms; municipal bonds are issued by cities, state bonds by U.S. states, and Treasury bonds by the federal government through the U.S. Department of the Treasury.

Stock represents ownership of a firm. The stock of a company is divided into shares. A firm receives financial capital when it sells stock to the public. A company’s first sale of stock to the public is called the initial public offering (IPO). However, a firm does not receive any funds when one shareholder sells stock in the firm to another investor. The rate of return on stock is received in two forms: dividends and capital gains.

A private company is usually owned by the people who run it on a day-to-day basis, although it can be run by hired managers. A private company owned and run by an individual is called a sole proprietorship, while a firm owned run by a group is called a partnership. When a firm decides to sell stock that can be bought and sold by financial investors, then the firm is owned by its shareholders—who in turn elect a board of directors to hire top day-to-day management—and is called a public company. Corporate governance is the name economists give to the institutions that are supposed to watch over top executives, though it does not always work.

Glossary

bond

a financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future

bondholder

someone who owns bonds and receives the interest payments

capital gain

a financial gain from buying an asset, like a share of stock or a house, and later selling it at a higher price

corporate bond

a bond issued by firms that wish to borrow

corporate governance

the name economists give to the institutions that are supposed to watch over top executives in companies owned by shareholders

corporation

a business owned by shareholders who have limited liability for the company’s debt yet a share of the company’s profits; may be private or public and may or may not have publicly-traded stock

dividend

a direct payment from a firm to its shareholders

initial public offering (IPO)

the first sale of shares of stock by a firm to outside investors

municipal bonds

a bond issued by cities that wish to borrow

partnership

a company run by a group as opposed to an individual

private company

a firm owned by the people who run it on a day-to-day basis

public company

a firm that has sold stock to the public, which in turn can be bought and sold by investors

shareholders

people who own at least some shares of stock in a firm

the stock of a firm, divided into individual portions

sole proprietorship

a company run by an individual as opposed to a group

stock

a claim on partial ownership of a specific firm

Treasury bond

a bond issued by the federal government through the U.S. Department of the Treasury

venture capital

financial investments in new companies that are still relatively small in size, but that have potential to grow substantially

Key Concepts and Summary