If you understood the discussion of the characteristics of common stocks, you should be able to explain the following statement: One of the benefits from stock ownership is the unlimited upside potential and the limited downside. What does this statement mean?
What will be an ideal response?
The common stockholders are residual claimants. This means that the most they can lose is their original investment, which pertains to the limited downside. The company could perform poorly, so poorly in fact that it could go bankrupt leaving many liabilities unpaid. For the common stockholders though, their losses are limited to their original investment. On the other hand, if the company is hugely successful, once the other liabilities are paid all, of the residuals belong to the common stockholders. This means that the dividends and or the future price of the stock will rise. There isn't a cap as to how large this potentially could be; it depends on the management and the success of the company. Stockholders do not face a ceiling on potential returns, which is the reason why the upside potential can be called "unlimited."
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Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would
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An imperfectly competitive firm faces a demand curve that is:
A. downward-sloping. B. perfectly inelastic. C. more than perfectly elastic. D. perfectly elastic.