Chapter 17 – The Stock Market Money and Banking – Michael Brandl ©2017 Cengage Learning

17-1a The Stock or Equity Market Stocks: Part ownership of a corporation Equity just means ownership Stock Market: Market for the buyer’s and selling of stocks or shares also the equity market. Corporations raise capital Borrow Funds by either issuing bonds, borrowing from banks or issuing stocks (debt vs equity) Issue Stocks (IPOs) Money and Banking – Michael Brandl ©2017 Cengage Learning

17-1a The Stock or Equity Market (cont’d) 2 types of stocks Common Stock – gets paid last/gets to vote at AGM Preferred Stock – gets paid first/does not vote at AGM Primary vs. Secondary Market for Equities Primary Market transaction: Stocks are sold by a corporation to members of the public (underwriters) https://youtu.be/11dsrhWmvaQ Shares are purchased through an investment bank Money and Banking – Michael Brandl ©2017 Cengage Learning

Trading in stocks Physical trading floor/open outcry (NY stock exchange) Some exchanges do not have a physical trading floor e.g. NASDAQ = National Association of Security Dealers Automatic Quotation OTC – by computer interaction without an exchange. Now lines between OTC and physical exchanges more blurred as pre- and post- market trading in major stocks done by NY stock exchange https://youtu.be/pFkEoCcchtI NASDAQ also tends to attract more tech and biotech companies whereas NYSE attracts larger industrial companies (e.g. GE, Dow Chemicals, Boeing) ADRs = American Despository Receipts https://youtu.be/XdZPNrCpEeQ

17-2 Pricing Common Stock Different ways to calculate stock prices: Dividend Discount Model: Single Period Dividend Discount Model: Multiperiod Liquidation (salvage) value often is ignored Dividends can fluctuate (for ordinary shares) depending on profits (retained earnings) of company Money and Banking – Michael Brandl ©2017 Cengage Learning

17-3a Overall Performance Business Cycles – Alternating rises and declines in the level of economic activity, sometime over several years. Stock Prices – Procyclical: The Stock Market tends to move in the same direction as the overall economy. Increasing when the economy expands, decreasing when the economy slows or slides into recession. Stock prices are affected inversely by interest rates Global impact Money and Banking – Michael Brandl ©2017 Cengage Learning

17-3b Stock Market Indexes A selection – not random -- of stocks whose price movements mimic the movements of the overall stock market. Different indexes: Dow Jones Industrial Average S&P 500 Wilshire 500 Money and Banking – Michael Brandl ©2017 Cengage Learning

17-3c Regulation Goal is to help instill confidence in the market Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s mission “. . . is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC is responsible for ensuring there is full and fair disclosure of information on securities to investors. The SEC is there to try to ensure that investors have complete and accurate information. Money and Banking – Michael Brandl ©2017 Cengage Learning

17-4a Efficient Market Hypothesis The question of stock market goes all the way back to the mid-nineteenth century Efficient market hypothesis argued that stock markets were efficient and did reflect all available information. The efficient market hypothesis can be broken down into three levels of efficiency: Weak Semi-strong Strong Money and Banking – Michael Brandl ©2017 Cengage Learning

17-4b Behavioral Finance Seeks to combine behavioral and cognitive psychology to explain market behavior and outcomes. Some of the topics now included: Overconfidence Confirmation Bias Framing Matters Heuristics Is rationality a safe assumption to make when analyzing stock market behavior? Money and Banking – Michael Brandl ©2017 Cengage Learning