Lecture14Stockmarketbasicsandstockpricing.pptVIP

Lecture 14: Stock market basics and stock pricing Mishkin Ch 7 – part A 159 Plus supplementary lecture notes Review Term structure of interest rate Yield curve Expectations theory long-term interest rate = average of short-term interest rates. Segmented markets theory Liquidity premium theory long-term interest rate = average + liquidity premium liquidity premium 0 and increase with maturity Interpret the yield curve using liquidity premium theory You can figure out what the market is predicting about future short-term interest rates by looking at the slope of the yield curve. Stocks A share of stock is a claim on the net income and assets of the corporation. Rights of shareholders Shareholders (stockholders) have ownership interest in the company proportional to shares owned. Large shareholder vs. small shareholders Rights include: rights to be ‘residual claimants’ voting rights ? influence management Shareholders’ payoff possible income: dividends: payments made periodically, usually every quarter, to stockholders. Shareholders are eligible for dividends, but no guarantee. capital gain: can sell stocks to earn price appreciation but may also incur loss from price decline. limited liability Stock exchanges New York Stock Exchange (NYSE, Big Board ) NASDAQ (National Association of Securities Dealers Automated Quotation System) electronic trading system Dow Jones and SP 500 indexes listed companies When a firm go public, it does not add to its debt. Instead, it brings in additional “owners” who supply it with funds. Read stock quotes 52-Wk Rng Highest and lowest share price achieved by the stock over the past 52 weeks. P/E Ratio Price-Earnings Ratio = (Current stock price)/(Current annual earnings per share) Volume Volume of shares traded yesterday (in 100s) Major events 1987 crash: total value of stocks fell by about a trillion dollars between August 1987 and the end of October 1987. 1990s boom: a major boom in last half of the 1990s, the value