investor. One receives the rate of return on stock in two forms: dividends and capital gains.

A private company is usually owned by the people who run it on a day-to-day basis, although hired managers

can run it. We call a private company owned and run by an individual a sole proprietorship, while a firm owned

and run by a group is a partnership. When a firm decides to sell stock that financial investors can buy and sell,

then the firm is owned by its shareholders—who in turn elect a board of directors to hire top day-to-day

management. We call this a public company. Corporate governance is the name economists give to the

institutions that are supposed to watch over top executives, though it does not always work.

17.2 How Households Supply Financial Capital

We can categorize all investments according to three key characteristics: average expected return, degree of
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