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

2. 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

3. 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)
Shares are purchased through an investment bank
Money and Banking – Michael Brandl ©2017 Cengage Learning

4. 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
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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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