Our protagonists

A firm is a commercial enterprise, a company that

buys and sells products and/or services to

An investor is a person that allocates capital with the expectation
consumers with the aim of making a profit. A of a future financial return or to gain an advantage. Types of

investments include: equity, debt securities, real estate, currency,

business entity such as a corporation, limited
liability company, public limited company, sole commodity, token, derivatives such as put and call options,

proprietorship, or partnership that has products or futures, forwards, etc.

services for sale is a firm.

The Firm The Investor

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Protagonist #2: The investor

Who is an investor?

• Could be an individual, group of individuals, households, a firm (public or

private), a financial intermediary, government and municipalities etc.

• The defining characteristics is that they seek to transfer and preferably increase,

the value of assets they currently own, across time and/or states of the world.

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Who is an investor?

• The defining characteristics is that they seek to transfer and preferably increase

value of assets they currently own, across time and/or states of the world.

What is an asset?

A resource with economic value controlled by the owner as a result of

past events (transaction); from which future economic benefits are

expected to flow. https://www.investopedia.com/terms/a/asset.asp

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In financial accounting, an asset is any resource owned by a

business or an economic entity. It is anything that can be owned or

controlled to produce value and that is held by an economic entity Economic productivity is the value of output obtained with
and that could produce positive economic value one unit of input.

Use of an asset?

• store of value to facilitate transactions

• To create incremental value through conducting economically productive

activity, or having a claim against the benefits of economically productive

activity.

Firms consumes money to own real assets,

which are expected to generate money

greater than the money consumed. ex:

farming, manufacturing.

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Categories of assets: Machines, land, gold

• Real asset: Resources used in production of goods and services.

• Financial asset: Claims on underlying real assets or cashflows thereof.

• Tangible assets: Physical form, can hold value and are measurable. ex:

plant, property and equipment, cash, securities etc.

• Intangible assets: lack physical form and tough to measure. ex: patents

etc.

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https://www.investopedia.com/terms/f/financialasset.asp

Financial assets:

• Equity

• Residual claim

• Payout through dividends

https: • Debt

• Guaranteed payments

• Payout through coupon payments and maturity payment.

• Derivatives

• Derive value from an underlying financial asset, commodities or interest rate.

• Futures (Predetermined price at a specific future date. Obligatory contract.)

• Options (Right, but not obligation to buy/sell at a specified price, up till or at a specified date.)

• Hybrid claims

• Preferred shares

• Convertible bonds

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The main difference between preferred and common stock is that preferred stock gives no
a convertible bond gives the holder
the option to convert or exchange it voting rights to shareholders while common stock does.

for a predetermined number of Preferred shareholders have priority over a company's income, meaning they are paid dividends
shares in the issuing company. before common shareholders.

Common stockholders are last in line when it comes to company assets, which means they will
be paid out after creditors, bondholders, and preferred shareholders.

Who is an investor?

• The defining characteristics is that they seek to transfer and preferably increase

value of assets they currently own, across time and/or states of the world.

https://www.investopedia.com/ask/answers/difference-between-preferred-stock-and-common-stock/

https://www.investopedia.com/investing/introduction-convertible-bonds/

Value of asset -> monetary value

Money -> Money is a medium of exchange for goods and services, with an agreed upon value.

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Who is an investor?

• The defining characteristics is that they seek to transfer and preferably increase

value of assets they currently own, across time and/or states of the world.

https://www.investopedia.com/terms/i/investor.asp

Increase in value through conducting economically productive activity, or having a claim against

the benefits of economically productive activity.

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Who is an investor?

• The defining characteristics is that they seek to transfer and preferably increase

value of assets they currently own, across time and/or states of the world.

Saving and investment

Insurance

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Protagonist #2: The investor

Investor in a nutshell

• Objective: Deploy surplus resources in economically productive activity

• Characteristics: Rational

• Constraint: Inefficient in doing economically productive activity by self

NEEDS

RESOURCES

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Protagonist #1: The firm

What is a firm?

• Firm refers to a generic business, could be:

• large or small, manufacturing or service, private or public.

• Basic legal forms of organizing firms:

• Sole proprietorship

• Partnership

• Corporation

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https://www.investopedia.com/terms/s/soleproprietorship.asp

• Sole proprietorship

• Business owned by a single person.

• Income from business taxed as personal income.

• Pro: Easiest to setup and manage.

• Con: Unlimited liability for the owner. Non-transferable ownership.

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https://www.entrepreneur.com/encyclopedia/partnership

• Partnership

• Business ownership of 2 or more people

• May be of 2 types

• General partnership: Unlimited liability for all debts

• Limited partnership: Limited liability to partner contribution to the partnership

• Pro: Partnerships are easy and cheap to setup and run. More flexible than proprietorship.

• Con: Unlimited liability and difficulty in raising finances. Non-transferable ownership for

general partner.

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https://www.investopedia.com/terms/c/corporation.asp

• Corporation (most important form of setting up a business)

an individual, company, or organization that
has legal rights and obligations.

• Distinct legal entity from its owners.

• Governed under articles of incorporation and set of bylaws.

Articles of incorporation are a set of formal documents filed with a government body to legally document the creation of a

corporation. Articles of incorporation generally contain pertinent information, such as the firm's name, street address, agent for

• Pro: Separate legal entity. Limited liability. Perpetual life (potentially). Transferable

ownership. Ease of raising finances.

• Con: Double taxation. Complexity and cost of setup and exacting compliance.

lifting the corporate veil is a legal decision to treat the rights or duties of a
corporation as the rights or liabilities of its shareholders.

Separate legal entity. Limited liability. -> Lifting of the Corporate Veil

Limited liability is a legal status where a person's financial liability is limited to a fixed sum, most commonly the value of a

person's investment in a company or partnership. If a company with limited liability is sued, then the claimants are suing the
company, not its owners or investors.

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