Define the following terms and explain their importance to the study of economics

Question

a. common stock
b. corporation
c. limited liability
d. plowback

Answer 1

a. Common stock represents partial ownership of a corporation. Based on the amount of shares issued, and the amount a stockholder owns, one can determine her percentage vote, and the percentage share of dividends of the corporation to which she is entitled.
b. A corporation is a firm that has the legal status of a fictional person. The firm is owned by stockholders and is run by a set of elected officers and a board of directors. The advantages of a corporation to the owners are limited liability, access to great quantities of capital, ease of operation with hired management, and permanence of the firm when an owner joins or leaves. The disadvantages are double taxation of income and the possibility that managers do not pursue the interests of the owners.
c. Limited liability refers to the protection from risk that corporate investors have. They cannot be asked to pay more than they have invested in the firm in the event of large debts incurred by the firm. This feature makes financial investment in corporate stock relatively more attractive than the proprietorship or partnership.
d. Plowback is the portion of corporate earnings retained by the firm and put back into the company. As a source of funds for U.S. corporations, plowback represents over 80 percent of the total funds.