2. The Stock Market and the Economy

3. The term "stock market" refers to the business of buying and selling stock. The stock market is not a specific place, though some people use the term "Wall Street"—the main street in New York City's financial district—to refer to the U.S. stock market in general.

4. The Stock Market and the Economy The stock market boom of the last half of the 1990s had a large impact on the economy. How much of the economic growth was due to the stock market boom? Did the economy in fact enter a new age?

5. Purpose of the Stock Market Almost every large corporation started out as a small, mom-and-pop operation and through growth, became financial giants. Wal-Mart, Dell Computer, and McDonald’s had combined profits of $10.34 billion this year. Wal-Mart was originally a single- store business in Arkansas.

6. Stock Market Dell computer began with Michael Dell selling computers out of his college dorm room. McDonald’s was once a small restaurant no one had heard of.

7. How did they grow? How did these small companies grow from tiny, hometown enterprises to three of the largest businesses in the American economy? They raised capital by selling stock in themselves.

8. Stocks and Bonds To make a large purchase, a firm can borrow the funds from a bank, but it can also issue a bond. A bond is a document that formally promises to pay back a loan under specified terms and a given period of time.

9. Stocks A stock is a certificate that certifies ownership of a certain portion of a firm. When a firm issues new shares of stock, it does not add to its debt. Instead, it brings in additional “owners” who supply it with funds.

10. Stocks Stockholders have a right to select the management of the firm and to share in its profits. Unlike bonds or direct borrowing, stocks do not promise a fixed annual payment. Returns depend on company performance. If profits are high, the firm may pay dividends.

11. Initial public offering (IPO): An initial public offer occurs when a company offers stock for sale to the public for the first time.

12. Some Financial Terms Earnings per Share: The amount of profit to which each share is entitled. Going Public: Slang for when a company is planning an IPO. IPO: Short for Initial Public Offering. An IPO is when a company sells stock in itself for the first time.

13. Stocks A capital gain is an increase in the value of an asset. A realized capital gain occurs when the owner of an asset actually sells it for more than he paid for it.

14. Stocks Most stocks bought and sold on the stock market daily are not newly issued but issued long ago, when the firm “goes public.” IPO – Initial Public Offering.

15. Determining the Price of a Stock Things that are likely to affect the price of a stock include: What people expect its future dividends will be When the dividends are expected to be paid The amount of risk involved Reports of earnings from companies Confidence of investors in the company

16. Investment Traits of Common Stock Blue-Chip Stock Common stock issued by a well- established company with a sound financial history and a stable pattern of dividend payouts - IBM

17. The Dow-Jones Industrial Average (DJIA) and Standard & Poor’s (S&P) are stock indexes that track a group of representative stocks.  These indexes reflect the general well- being of the stock market as a whole.  Shares of stock are bought and sold at a stock market, or stock exchange. Stocks and Stock Markets (cont.)

18. Stock Exchanges Stock Exchange: Organization of individuals formed to provide an institutional setting in which stock can be traded. - Ex. NYSE – New York Stock Exchange The Trading Floor: Actual physical location trading may occur The floor is equipped with a vast array of electronic communications equipment for conveying buy-and-sell orders or confirming completed trades.

19. The NYSE has 1,366 exchange members. The exchange members Are said to own “seats” on the exchange. Collectively own the exchange, although it is managed by a professional staff. The seats are regularly bought and sold. In 2003, seats were selling for about $2 million. Seats can be leased, too. Both prospective buyers and leaseholders are closely scrutinized. Seat holders can buy and sell securities on the exchange floor without paying commissions. Over 500 NYSE members are commission brokers. Commission brokers execute customer orders to buy and sell stocks. Almost 500 NYSE members are specialists, or market makers. Market makers are obligated to maintain a “fair and orderly market” for the securities assigned to them.

20. The Major Exchanges and the OTC Market New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Regional Stock Exchanges (i.e., Chicago Stock Exchange and Pacific Stock Exchange in Los Angeles and San Francisco) Foreign Stock Exchanges (i.e., London and Tokyo)

21. Brokers Individuals or organizations who receive and execute buy-and-sell orders on behalf of other people in return for commissions  Discount Brokers  Online Trading  Full Service Brokers

22. The Stock Market Dow Jones Industrial Average Index: An index based on the stock prices of 30 actively traded large companies. The oldest and most widely followed index of stock market performance. NASDAQ: An electronic index based on the stock prices of over 5,000 companies traded on the NASDAQ stock market. The NASDAQ market takes is name from the National Association of Securities Dealers Automated Quotation System.

23. The name “Nasdaq” is derived from the acronym NASDAQ, which stands for National Association of Securities Dealers Automated Quotations system. Introduced in 1971, the Nasdaq market is a computer network of securities dealers who disseminate timely security price quotes to Nasdaq subscribers. The Nasdaq is the second largest stock market in the U.S. in terms of total dollar volume of trading. The most widely followed barometer of day-to-day stock market activity is the Dow Jones Industrial Average (DJIA), or “Dow” for short. The DJIA is an index of the stock prices of 30 large companies representative of American industry.

24. The Stock Market Standard and Poors 500 (S&P 500) Index: An index based on the stock prices of the largest 500 firms traded on the New York Stock Exchange, the NASDAQ stock market, and the American Stock Exchange.

25. The Stock Market From a macroeconomic perspective, the Dow Jones Industrial Average and the NASDAQ index cover too small a sample of firms. A better measure of the market value of all firms in the economy is the Standard and Poors 500 stock price index, called the S&P 500.

26. The S&P 500 Stock Price Index, 1948 – 2002

27. The Stock Market Between 1995 and 2000, the S&P 500 index rose 226 percent, an annual rate of 25 percent! This is by far the largest stock market boom in U.S. history. This boom added $14 trillion to household wealth, about $2.5 trillion per year.

28. Stock Market Effects on the Economy An increase in stock prices causes an increase in wealth, and consequently an increase in consumer spending. Investment is also affected by higher stock prices. With a higher stock price, a firm can raise more money per share to finance investment projects.

29. Bull Market Period of falling stock prices Period of rising stock prices Bear Market

30. Bull and Bear Markets, 1972 ‑ 2000

31. 3-Month Treasury Bill Rate, 1996 I – 2002 III Had there been no boom: The 3-month Treasury bill rate and interest rates as a whole would have been lower.

32. Fed Policy and the Stock Market This figure shows that the Fed is influenced by the stock market. The Fed cares about the stock market to the extent that the market affects the things that it ultimately cares about, namely output, unemployment, and inflation.

33. 32 The SEC The Securities and Exchange Commission (SEC). n The SEC is a government agency which was created in 1934. n Created to regulate the Stock Market and oversee activities of major companies.

34. Mutual Funds Money from shareholders are pooled and invested in a wide range of stocks or bonds. - Managed by professional managers Offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Advantage: If one stock does poorly, others may do well, balancing your overall profit. Disadvantage: High fees for management

35. Mutual Funds An investment company that issues its portfolio shares to investors. Each investor shares proportionately in the income and investment gains and losses, as well as the brokerage expenses and management fees. Open end fund: # of shares issued solely depends on investor demand Bought and sold directly through the investment company (not an exchange)

36. Flow Chart

37. Bonds Bond: Security through which an issuer promises to pay the buyer a certain amount of money by a specified future date Government Bond: Bond issued by the federal government Municipal Bond: Bond issued by a state or local government Corporate Bond: Bond issued by a company as a source of long-term funding

38. Key Terms and Concepts bond capital gain capital gain Dow Jones Industrial Average Index Dow Jones Industrial Average Index NASDAQ Composite Index NASDAQ Composite Index realized capital gain realized capital gain Standard and Poors 500 (S&P 500) Index Standard and Poors 500 (S&P 500) Index stock

39. Other Investments Mutual Fund Company that pools investments from individuals and organizations to purchase a portfolio of stocks, bonds, and short-term securities No-Load Fund Mutual fund in which investors pay no sales commissions when they buy in or sell out Load Fund Mutual fund in which investors are charged sales commissions when they buy in or sell out