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Special Topics

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Special Topics

  1. 1. Risk Cash flows do not match EXPECTATION. <ul><li>Is a company with roller-coaster like sales figure a risky company? </li></ul><ul><li>Why are Pharmaceutical companies so big? </li></ul><ul><li>What kind of company is GE like? Why? </li></ul><ul><li>Why do most people can't sleep tight after loosing money in the casino/stock while some can? </li></ul>
  2. 2. Independent or Correlated Risks <ul><li>        - stand-alone risk (project risk)      - firm risk      - diversified portfolio risk      - market risk </li></ul>
  3. 3. Special Topic II Stock
  4. 4. #1 Goal of Firm: MAXIMIZE SHAREHOLDER WEALTH <ul><li>Some questions: </li></ul><ul><li>Is this true in every economy? Why CEOs invest in money loosing projecting? </li></ul><ul><li>Why do companies almost always defend against hostile takeover? </li></ul>
  5. 5. The Anatomy of Stocks <ul><li>Firms issue shares of stock when they need to raise long-term financial capital </li></ul><ul><ul><li>usually for investment spending </li></ul></ul><ul><li>A share of stock represents equity in a corporation and entitles the owner to a share of the corporation’s profits </li></ul><ul><li>Stock may be preferred stock or common stock </li></ul>
  6. 6. Preferred Stock <ul><li>Owners of preferred stock receive a fixed dividend to which they are entitled before owners of common stock receive anything </li></ul><ul><ul><li>similar to the interest payment that a bondholder receives </li></ul></ul><ul><ul><li>dividends must only be paid to preferred stockholders if the firm earns a profit (unlike interest which must always be paid) </li></ul></ul><ul><ul><li>dividend payments are not tax-deductible (unlike interest payments) </li></ul></ul>
  7. 7. Common Stock <ul><li>Common stockholders receive a variable dividend after the preferred stockholders have been paid and retained earnings have been set aside </li></ul><ul><ul><li>retained earnings are profits not distributed to stockholders and are usually used to fund investment projects </li></ul></ul>
  8. 8. The Anatomy of Stocks <ul><li>All companies that issue publicly traded shares of stock are regulated by the Securities and Exchange Commission (SEC) </li></ul><ul><ul><li>the SEC has broad disclosure requirements to protect investors </li></ul></ul><ul><ul><ul><li>the financial condition of the corporation </li></ul></ul></ul><ul><ul><ul><li>information about key personnel </li></ul></ul></ul><ul><ul><ul><li>any changes that would be important to stockholders </li></ul></ul></ul>
  9. 9. The Stock Markets <ul><li>When most people think about the stock market, they think about Wall Street </li></ul><ul><li>Virtual vs. Physical </li></ul>
  10. 10. The Stock Markets <ul><li>The expanded use of computers to execute trades has accommodated the greater volume of trading and has facilitated an increase in program trading by institutional investors </li></ul><ul><ul><li>allows institutional investors to pre-program computers to buy or sell a large basket of stocks </li></ul></ul>
  11. 11. The New York Stock Exchange <ul><li>The New York Stock Exchange (NYSE) is the world’s largest market for trading securities </li></ul><ul><ul><li>about 2,800 companies including more than 470 non-U.S. companies </li></ul></ul><ul><li>For a stock to be listed, the corporation must apply to the exchange and meet several criteria dealing with the size and number of shareholders </li></ul>
  12. 12. The New York Stock Exchange <ul><li>The NYSE is a highly-visible auction-type market where members (acting as agents for others) buy and sell shares of stock </li></ul><ul><ul><li>each member has purchased a seat on the exchange </li></ul></ul><ul><ul><ul><li>the price of a seat is determined by supply and demand </li></ul></ul></ul><ul><ul><li>the benefits of membership include direct participation in stock trading and charging commissions to customers for trading stocks </li></ul></ul>
  13. 13. The New York Stock Exchange <ul><li>Each firm whose stock is listed is assigned to a single post where a specialist in that stock manages the auction process </li></ul><ul><ul><li>members of the NYSE bring all large buy and sell orders to the floor </li></ul></ul><ul><ul><li>orders are then funneled to the appropriate post </li></ul></ul><ul><ul><li>the forces of supply and demand determine stock prices </li></ul></ul>
  14. 14. The New York Stock Exchange <ul><li>When a new price is reached, a clerk records the information and sends it out over the ticker </li></ul><ul><ul><li>provides a constant stream of stock symbols and prices </li></ul></ul><ul><ul><ul><li>each symbol consist of 3 or fewer letters and represents the stock of a particular corporation </li></ul></ul></ul>
  15. 15. Other Exchanges <ul><li>The American Stock Exchange </li></ul><ul><ul><li>over 660 corporations </li></ul></ul><ul><li>Regional exchanges that primarily trade stocks listed on the NYSE are located in Boston, Chicago, San Francisco, and Philadelphia </li></ul><ul><li>Many foreign countries also have stock exchanges </li></ul>
  16. 16. The Over-the-Counter Market <ul><li>The over-the-counter market is composed of thousands of securities dealers located all over the country </li></ul><ul><ul><li>transactions are executed over the telephone or via computer </li></ul></ul><ul><ul><li>dealers buy and sell securities at publicly quoted prices </li></ul></ul><ul><ul><li>market is regulated by the National Association of Securities Dealers (NASD) </li></ul></ul>
  17. 17. The Over-the-Counter Market <ul><li>About 3,000 of the companies whose stocks are traded over the counter are also members of the National Association of Securities Dealers Automated Quotation System (NASDAQ) </li></ul><ul><ul><li>the world’s first electronic stock market </li></ul></ul><ul><ul><li>stocks are traded on an advanced computer system that provides immediate information about prices and the number of shares traded </li></ul></ul>
  18. 18. Stock Market Indexes <ul><li>The Dow Jones Industrial Average (the Dow) measures movements in the stock prices of the 30 largest companies in the U.S. </li></ul><ul><ul><li>oldest index in use today (introduced in 1896) </li></ul></ul><ul><ul><li>an unweighted average of the sum of the daily closing prices (adjusted to take account of the effects of stock splits and stock dividends) </li></ul></ul>
  19. 19. Stock Market Indexes <ul><li>The Standard & Poor’s 500 (S&P 500) is a weighted index of prices of 500 broad-based corporations </li></ul><ul><ul><li>weighted by their relative values </li></ul></ul>

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