L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY H OW A RE S TOCK P RICES D ETERMINED ? L ESSON 14
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Discovering the Law of Demand Amount you pay for one cup of Stomping Grounds Coffee 1234Total $10 $5 $4 $3 $2 $1 $0 (free coupons) L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.1
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Discovering the Law of Supply Amount you would receive as wages for one hour of work 1234Total $30 $25 $20 $15 $10 $0 (volunteer) L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.2
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY The Laws of Demand and Supply Law of Demand: At lower prices, people choose to buy more. At higher prices, people choose to buy less. Law of Supply: At higher prices, people choose to produce more. At lower prices, people choose to produce less. L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.3
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Classroom Tally Sheet PriceRound 1Round 2Round 3 $ $5 L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.4
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Supply and Demand for Mighty Wings, Inc. Shares L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.5
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Change in Demand for Mighty Wings, Inc. Shares L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.6
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Change in Supply for Mighty Wings, Inc. Shares L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.7
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY The Role of Expectations Demand in Stock Markets People are more likely to buy stock in a given company if the have positive expectations regarding the success of that company. They might expect: The share price to increase. An improved dividend payment. Supply in Stock Markets People are more likely to sell stock in a given company if they have negative expectations regarding the success of that company. They might expect: The stock price to decrease in response to changes in the industry, world events, or other uncertainties. The dividend to decrease. Better opportunities to purchase other stocks, bonds, or other types of investments. L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? S LIDE 14.8
L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Review of Supply and Demand L ESSON 14 – H OW ARE S TOCK P RICES D ETERMINED ? The law of demand states (regarding stocks) that buyers choose to purchase more shares at lower prices and fewer shares at higher prices, all else constant. The law of supply states (regarding stocks) that sellers choose to sell more shares at higher prices and fewer shares at lower prices, all else constant. An equilibrium price exists when the quantity of shares demanded at that price equals the quantity of share supplied. Stock prices change as a result of changes in the supply of and demand for shares of the stock in question. S LIDE 14.9