So what is a stock? Well, we first have to think about the corporation. So the word corporation comes from the Latin word corpus, meaning body. And what it is, is an organization that is. Incorporated, that means it's made as if it has a body, as if it's a person. In fact, the word person in law typically includes corporations. If you wanted to say an individual you could say a natural person. [LAUGH] A corporation is an artificial person. The idea is to create something that legally has a lot of the rights that individuals do. And traditionally it would be created by a royal charter, prescription, or act of legislature. More recently it's done according to procedures that are widely available. In Ancient Rome they had corporations, they were called publicani. But they were limited, and they had a stock market. This is what you can read in the Goetzmann book. The stock market of Ancient Rome was outdoors on the street in front of one of the temples in the Roman Forum. And you could go and buy shares in company. There isn't much data left about stock prices then. Most of the companies, at least later in Ancient Rome were of a certain kind. They were tax collectors. The Roman government paid private companies to collect taxes for them. Why not, right? It's not the way we normally do things today. But rather than go out after everyone, the government just hired a company to do it. And those were traded on the stock exchange. They didn't develop much. I don't know the reason. They didn't have any insurance companies or shipping companies. Those kinds of activities were done without incorporation. Now let's talk about a modern corporation. The modern corporation in the United States let's talk about a for-profit company like those that are on the New York Stock Exchange. It's governed by a board of directors that is elected by the shareholders. So it's called shareholder democracy. Typically one share, one vote. So it sounds like a sensible thing. It's a little bit like the electoral college in U.S. Constitution for the government. You vote for electors and then the electors vote for the president. Similarly, you as a shareholder vote your shares, one share one vote in a company sounds sensible to elect the board of directors. And then the board of directors votes on who will be the president. The CEO or president, we now tend to say CEO, chief executive officer. And companies will also have a president. But the CEO is generally the top, for instance. So the person, the CEO is hired by the board, serves as an employee, and has to report to the board of directors. Even non-profits are somewhat like, they do have a board of directors. And then they hire the president. And there are other structures in Germany, notably, a company will have two boards, an Aufsichtsrat and a Vorstand. The Aufsichtsrat is a supervisory board which stands on top of the whole operation. The Vorstand does the details, manages. Well, it doesn't actually, it hires people to manage the company. But it's in charge of day-to-day activities. But it's the same basic idea, they just divide it into two parts. Now I've been talking about for-profit corporations, we also have non-profit corporations. A for-profit corporation is owned by the shareholders and the shareholders have one vote each. The shareholders have the claim on the earnings of the company, and have to pay a corporate profits tax. The company has to pay a tax to the government on its earnings. Non-profit corporations, for example, Yale University are not owned by anyone. Now you might ask, how can that be? How can it not be owned by anyone? Well, they have a board of directors called the Yale Corporation. And they have a prevision where alumni can elect them. Other non-profits would just be self-perpetuating. That is the directors appoint their own successors. It sounds a little wild, because what if the directors get crazy? Then the whole thing could go down in craziness. But that's the way we leave it. Generally it works. Generally the board appoints other people who have normally some idealistic commitment to the purposes of the non-profit. The for-profit exists for shareholders. The non-profit exists for whatever the charter of the non-profit says, it promotes some cause. For-profits have a price per share. Non-profits are not traded and so they don't have a price, no price for them. >> You mention non-profit organizations in your lecture, so can you talk about, does non-profit status means that their revenues should never exceed their costs to maintain a non-profit status? >> Yeah, non-profit, maybe it's misleading. It doesn't mean that they don't make profits. It means that they don't distribute profits to shareholders. The purpose is not to distribute profits. But they do have a purpose. In a for-profit company, the objectives that are focused on are the shareholders. They take the money and they do what they want with it. But in a non-profit, the non-profit can make as much profits as it wants but it keeps them in the company and spends them on some purpose. A non-profit has to be defined with a purpose. Because it is doesn't go, otherwise they would just sit on the money forever. And, in fact, that kind of thing has happened where non-profits accumulate huge amounts of money. And people wonder, where's it going to go? Where's it going to be spent? Sometimes non-profits are developed that have a goal that gets lost later. One famous example is the Shaker Church. That was a Christian church in the 19th century and they created a foundation and they accumulated money. But there aren't hardly any Shakers left, there might be two left in the world. And so the foundation is being run by people who have to think, well what would I do if I were a Shaker? That is a potential problem with non-profits. But usually they're defined with a purpose that will endure and will continue to motivate their use of the profits.