1. STOCK MARKET
PRESENTED BY :
KULDEEP YADAV
PGDM 2010-12
SEM - 3 RD
2. STOCK MARKET AND MACROECONOMY
Share of stock is a private financial asset, like a
corporate bond
Both are issued by corporations to raise funds, both
offer future payments to their owners
but what is the main difference between these two?
When a firm issues new shares of stock- called public
offerings – sale of which generates funds for the firm-
newly issued shares can be sold to someone else
Virtually all the shares traded in the stock market are
previously issued- trading doesn’t involve the firm that
issued the stock
3. Contd
• But why the firm still concerned about the price of its
previously issued share?
- first, the firm’s owners-its stockholders-want high share
prices because that is the price they can sell at
-second, previously issued shares are perfect substitute of
new public offerings –
------------therefore, the firm cannot expect to receive higher
price for its new shares than the going price on its old shared
---what is the result then??
4. Explaining Stock Prices—Step #1: Characterize The
Market
• Price of a share of stock—like any other— is determined in a
market
• We’ll characterize the market for a company’s shares as perfectly
competitive
• View stock market as a collection of individual, perfectly competitive
markets for particular corporations’ shares
• Many buyers and sellers
• Virtually free entry
5. Step #2: Find The Equilibrium
• Like all prices in competitive markets, stock prices are determined by supply
and demand
• However, in stock markets, supply and demand curves require careful interpretations
• Figure 1 presents a supply and demand diagram for shares of Fedex
Corporation
• On any given day, number of Fedex shares in existence is just the number that
the firm has issued previously
• Just because 302 million shares of Fedex stock exist, that does not mean that this is the
number of shares that people will want to hold
• People have different expectations about firm’s future profits
• At any price other than $90 per share, number of shares people are holding (on the
supply curve) will differ from number they want to hold (on the demand curve)
• Only at equilibrium price of $90— people satisfied holding number of shares they are
actually holding
• Stocks achieve their equilibrium prices almost instantly
6. Figure 1: The Market For Shares of Fedex
Corporation
Price per Share S
$120
90 E
60
D
302 million Number of Shares
7. Step #3: What Happens When Things Change?
• Supply curve for a corporation’s shares shifts rightward whenever there is a
public offering
• The changes we observe in a stock’s price—over a few minutes, a few days, or a few
years—are virtually always caused by shifts in demand curve
• what causes these sudden changes in demand for a share of stock?
• In almost all cases, it is one or more of the following three factors
• Changes in expected future profits of firm
• Any new information that increases expectations of firms’ future profits will shift demand
curves of affected stocks rightward
• Including announcements of new scientific discoveries, business developments, or changes in
government policy
• Macroeconomic Fluctuations
• Any news that suggests economy will enter an expansion, or that an expansion will continue,
will shift demand curves for most stocks rightward
• Changes in the interest rate
• A rise (drop) in the interest rate in the economy will shift the demand curves for most stocks
to the left (right)
8. Step #3: What Happens When Things Change?
• Even expectations of a future interest rate change can shift demand
curves for stocks
• Such an event occurred on February 27, 2002, when Fed Chair
Greenspan announced that it appeared economy was recovering
from its recession
• News that causes people to anticipate a rise in interest rate will shift
demand curves for stocks leftward
• Similarly, news that suggests a future drop in the interest rate will shift demand
curves for stocks rightward
9. Figure 2a: Shifts in the Demand for Shares Curve
(a)
Price S The demand curve shifts rightward when
per Share new information causes expectations of:
• higher future profits
• economic expansion
$75 • lower interest rates
60
D2
D1
298 million Number of Shares
10. Figure 2b: Shifts in the Demand for Shares Curve
(b)
Price S The demand curve shifts leftward when
per Share new information causes expectations of:
• lower future profits
• recession
• higher interest rates
60
45
D1
D3
298 million Number of Shares
11. Figure 3: The Effect of Higher Stock Prices on the
Economy
(a) (b)
Price AS
Aggregate Expenditure
Level
AEhigher stock prices
AElower stock prices
P2
P1
ADhigher stock prices
45° ADlower stock prices
Y1 Y2 Real GDP Y1 Y3 Y2 Real GDP
12. How the Economy Affects the Stock
Market
• Let’s look at the other side of the two-way relationship
• How economy affects stock prices
• Many different types of changes in the overall economy can
affect the stock market
• Let’s start by looking at the typical expansion
• Real GDP rises rapidly over several years
• In typical expansion (recession), higher (lower) profits and
stockholder optimism (pessimism) cause stock prices to rise
(fall)
13. WHAT IS THE REASON FALLING DOWN STOCK
MARKET ?
• The ghost of 2008 seems to have returned to haunt Indian investors
with the stock market showing no signs of bouncing back.
• With adverse signals coming from within the country (high interest
rates and slow down in economic activity) and the global markets
(Europe and US debt crisis), the BSE Sensex fell 2 per cent to
16,141.67. Intra-day, it dipped below the 16K mark, but bounced
back at close, mainly on account of short covering
14. CONT….
He recent decline of US stocks proved to be the cause
of panic not only in the United States but all over the
world. For some reason or another, many countries are
still dependent on the many economic benefits brought
by the most powerful country in the world, and last
week’s negative plunge has resulted into a worldwide
confusion.
In this line of economic disadvantage, some compares
the current downfall to the 2008 meltdown which was
also felt all over the globe. As fear heightens since little
or no recovery and influx is seen, selling of common US
stocks may be seen as a premature decision and is a
result of panic and unwanted alarm.
15. CONT….
Fiscal development also saw their inconvenience with a
meager 1% rise in gross domestic products during the first half
of this year. To make matters worse than they already are, S&P
relegated US credit ratings, pointing to insufficient progress
and long term budget problems in Washington.
Will the continuous rapid fall of the economy spark
another recession? As many of us know, unemployment is still
a major factor in the US and current economic troubles will
most likely to be another core reason.
Even without the eventual promise of immediate financial
recovery, investors are still advised to remain on trail; of
course, no one gets rich overnight and the potential of the
country to get back on its track is a big possibility.
17. CONT…
US investment banking firm invokes contract clause
enabling it to cut the pay of London-based investment
bankers
18. NT…..
• Except BSE-Realty, all the other 12 sectoral indices, including BSE
Capital Goods, BSE Power and BSE Oil & Gas, ended in the red.
• The BSE Sensex, BSE Mid-cap and the BSE-500 indices have fallen
about 13 per cent in the last one month while the BSE Small-cap has
slumped 17 per cent.
