Stocks, Stock Markets, and Market Efficiency

 Represents the original capital paid into or invested in the business by its founders  Serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors  Stock prices tell the value of the companies that issued the stocks  Fluctuate in quality and value

 Shares in a firm’s ownership  Small denominations  Transferable  The shares are registered in the names of brokerage firms that hold them on investors’ behalf

 Stockholders are paid with dividends ◦ Board of directors decide when to pay out dividends  Voting right, the shareholders elect the board of directors  Limited liability: the max loss of shareholders is their initial investment (the price paid for the stocks in the first place)

 Preferred stockholders have a greater claim to a company's assets and earnings  Dividends are paid for preferred stockholders before common stockholders ◦ Dividends are paid at regular intervals  No voting right  No election right

 Stock-market indexes ◦ Measuring method of a section of the stock market ◦ Tell how much the value of an average stock has changed and how much total wealth has gone up or down ◦ Manager’s performance benchmarks  World/Global index ◦ MSCI World and S&P Global 100  National index ◦ The American S&P 500, the Canadian MSCI, ◦ the Japanese Nikkei 225

 Performance of 30 large, publicly owned companies based in the United States  The average is price-weighted, and to compensate for the effects of stock splits and other adjustments  The percentage change in the DJIA overtime is the percentage change in the sum of the 30 prices

Ex:  Purchasing of ◦ Stock 1 at $50.00 ◦ Stock 2 at $  An increase of 15% in the first stock ◦ 1 st stock price increases to $57.50 ◦ Total value in the portfolio: $  An increase of 15% in the second stock ◦ 2 nd stock price increases to $ ◦ Total value in the portfolio: $165.00

 Index conducted from the price of many more stocks  500 firms, the largest firms in the U.S. economy, trade on either of the 2 largest American stock market exchanges: the New York Stock Exchange and the NASDAQ  Value-weighted index

 Nasdaq Composite Index ◦ 5,000 companies traded on the OTC (over-the- counter) market ◦ Value-weighted index  Wilshire 5000 : covers all publicly traded stocks in the U.S. ◦ 6,500 companies traded on The New York Stock Exchange, the American Stock Exchange, and the OTC ◦ Value-weighted index

 Are contracts that allow people/ investors to buy or sell a specific type of asset at a specific time and at a given price

 Futures contract: ◦ Standardized contract ◦ Clearing house guarantees the transactions ◦ Settlement occurs at the end of the contract ◦ Not delivery  Forwards contract: ◦ Non-standardized (private) contract ◦ Default might happen ◦ Marked-to-market daily, daily changes are settled day by day until the end of the contract. ◦ Used by hedgers that want to eliminate the volatility of an asset's price, and delivery of the asset or cash settlement will usually take place

 Right, not obligation to buy or sell an asset on or before a particular date  To protect investors from unexpected price change  Call option: ◦ Purchase at a specific price  Put option: ◦ Sell at a specific price

 A contract to buy or sell at an agreed to price, stated dollar amount of T-bills to be sold at the next weekly auction  Trading starts when BoC announces the size of the following week’s auction. And ends before the results of the auction are announced

P today =[D next year /(1+i)] + [P next year /(1+i)^1]  P today : the purchase price of product  D next year : amount of dividend payment  P next year : sale price at 1 year later  i: interest rate

P today = [D next year /(1+i)] + [D in 2 years /(1+i)²] + [P next year /(1+i)²]  The price today is the present value of the sum of the dividends plus the present value of the price at the time the stock is sold 2 years from now

P today = Dividend per share Discount rate – Dividend growth rate P today = D today i - g

 Stock prices tell the market value of companies, which guides the allocation of resources  Stocks are less risky if holding for a long periods than short periods  Efficient stock markets not reflect the movement of stock price, caused by asymmetry of information