Reading Quiz

Questions

1. What is the most significant difference between a corporation and a sole proprietorship?
2. Define each of the following

• Limited liability
• Dividend
• Corporate charter
• IPO

3. Describe two benefits of owning stock.
4. Why might a person purchase preferred stock rather than common stock?
5. A stock market in which prices are rising is a ________ market; a market in which prices are falling is a __________ market.
6. How does a call option limit your risk?

Answers

1. Reasonable answers include

• Corporations are distinct legal entities separate from their owners.
• Corporations offer limited liability.
• Ownership of a corporation is represented by shares of stock.

2.

•  Limited liability: This is one of the benefits of incorporating. A corporation owner's assets, under limited liability, are separate from the corporation's assets. Limited liability also shields an owner's personal assets from financial and legal action taken against the corporation.
• Dividends: The quarterly distribution of corporate profits to shareholders.
• Corporate charter: A state-issued license to incorporate. Businesses wishing to incorporate must secure a charter.
• IPO: Initial Public Offering. The first issue of stock when a privately owned corporation decides to "go public" or sell stock to the general public.

3. Reasonable answers include

• Individuals can become partial owners of an enterprise without knowing a thing about business or the specific service or product produced by the enterprise.
• Individuals become partial owners in a business that is professionally managed.
• Individuals' personal assets are shielded from any legal or financial liabilities taken on by the corporation. Like all of the corporation’s owners, they enjoy limited liability; however, the money they paid for the stock is at risk.
• Individuals' ownership is easily transferred.

4. Preferred stock guarantees some sort of dividend. Also, preferred stock holders are closer to the front of the line if the corporation goes out of business. If the company goes broke, creditors and bondholders have first claim on the company’s assets; preferred stock holders come next.
5. bull, bear
6. A call option gives you the option of selling stock at the strike price during an agreed-upon period of time. This allows you to hedge your bets, to lock in a certain price before the price changes to your disadvantage.