The document discusses the relationship between the stock market and economic activity. It begins by introducing the topic and explaining how firms raise funds through debt and equity financing. It then defines what a stock market is, how stocks are traded, and how stock prices are determined by supply and demand. Several factors that can influence stock prices are explained, including economic conditions, firm-specific factors, and market factors. The relationship between the stock market and broader economy is explored, specifically how changes in the stock market can impact aggregate demand and economic growth through wealth and investment effects, and how economic conditions can in turn impact stock prices and investor sentiment. The role of the Federal Reserve in responding to stock market fluctuations is also summarized.
Stock prices can provide useful information about the overall economy and future economic conditions. However, stock prices are an imperfect indicator that do not always accurately predict recessions or turnarounds. While stock prices often decline before recessions as investor sentiment turns negative, they have also declined and recovered without a recession occurring. Additionally, stock prices do not always start declining far in advance of a recession. So while monitoring stock prices can offer insights, they should be used alongside other economic indicators to help assess the overall health of the economy.
The document discusses stock exchanges and their functions. It defines a stock exchange as a centralized market for buying and selling stocks where prices are determined by supply and demand. A stock exchange assists, regulates, and controls the business of buying and selling securities. It provides a place for securities trading, listing of companies, distribution of new securities, mobilization of savings, and capital formation. The document discusses various players in the stock market like brokers, jobbers, and speculators. It also outlines the process of trading, including order placement, execution, contract notes, and settlement.
The document discusses the stock market, including definitions of key terms like stock exchange and demat account. It describes the major stock exchanges in India - the National Stock Exchange and Bombay Stock Exchange - and their key features. It also covers types of trading in the stock market, investments, benefits, causes of price fluctuations, and classifications of markets. The role of the market regulator SEBI is outlined. Speculation and different types of speculators are defined. The Greece debt crisis of 2009 and its effects on the Indian economy are briefly summarized.
The document discusses stock exchanges, including what they are, their functions, types of members (brokers and jobbers), and speculation. It provides definitions and examples of key stock exchange terms. It also lists some of the largest stock exchanges in the world and in India, highlighting features of important Indian exchanges like the National Stock Exchange and Over-The-Counter Exchange of India.
The document discusses key aspects of secondary markets. It defines secondary markets as markets where securities are traded after being initially offered to the public in primary markets. The majority of trading occurs in secondary markets, which comprise equity and debt markets. Secondary markets offer both sellers and buyers advantages, such as sellers recouping a portion of the original purchase price, though they can also reduce sales for original sellers. Key products traded in secondary markets include equity shares, government securities, debentures, and bonds.
This document discusses various investment avenues available in India. It outlines essential features of investments such as safety, liquidity, income, growth, legality and tax implications. Some key investment alternatives mentioned include bank deposits, post office schemes, company fixed deposits, public provident fund, equity shares, bonds, money market instruments, financial derivatives, mutual funds, life insurance and real estate. The document provides brief descriptions of these different investment types.
Presentation on stock market and growthSolara Kadouf
The stock market allows individuals and companies to trade shares of ownership in public companies. For individuals, it provides an opportunity to generate income and increase wealth through dividends or capital gains. Companies benefit by raising capital through stock offerings at a lower cost than other financing options. The stock market also benefits the overall economy by facilitating efficient allocation of capital and corporate governance. However, financial crises can negatively impact stock prices and dampen investment.
Stock prices can provide useful information about the overall economy and future economic conditions. However, stock prices are an imperfect indicator that do not always accurately predict recessions or turnarounds. While stock prices often decline before recessions as investor sentiment turns negative, they have also declined and recovered without a recession occurring. Additionally, stock prices do not always start declining far in advance of a recession. So while monitoring stock prices can offer insights, they should be used alongside other economic indicators to help assess the overall health of the economy.
The document discusses stock exchanges and their functions. It defines a stock exchange as a centralized market for buying and selling stocks where prices are determined by supply and demand. A stock exchange assists, regulates, and controls the business of buying and selling securities. It provides a place for securities trading, listing of companies, distribution of new securities, mobilization of savings, and capital formation. The document discusses various players in the stock market like brokers, jobbers, and speculators. It also outlines the process of trading, including order placement, execution, contract notes, and settlement.
The document discusses the stock market, including definitions of key terms like stock exchange and demat account. It describes the major stock exchanges in India - the National Stock Exchange and Bombay Stock Exchange - and their key features. It also covers types of trading in the stock market, investments, benefits, causes of price fluctuations, and classifications of markets. The role of the market regulator SEBI is outlined. Speculation and different types of speculators are defined. The Greece debt crisis of 2009 and its effects on the Indian economy are briefly summarized.
The document discusses stock exchanges, including what they are, their functions, types of members (brokers and jobbers), and speculation. It provides definitions and examples of key stock exchange terms. It also lists some of the largest stock exchanges in the world and in India, highlighting features of important Indian exchanges like the National Stock Exchange and Over-The-Counter Exchange of India.
The document discusses key aspects of secondary markets. It defines secondary markets as markets where securities are traded after being initially offered to the public in primary markets. The majority of trading occurs in secondary markets, which comprise equity and debt markets. Secondary markets offer both sellers and buyers advantages, such as sellers recouping a portion of the original purchase price, though they can also reduce sales for original sellers. Key products traded in secondary markets include equity shares, government securities, debentures, and bonds.
This document discusses various investment avenues available in India. It outlines essential features of investments such as safety, liquidity, income, growth, legality and tax implications. Some key investment alternatives mentioned include bank deposits, post office schemes, company fixed deposits, public provident fund, equity shares, bonds, money market instruments, financial derivatives, mutual funds, life insurance and real estate. The document provides brief descriptions of these different investment types.
Presentation on stock market and growthSolara Kadouf
The stock market allows individuals and companies to trade shares of ownership in public companies. For individuals, it provides an opportunity to generate income and increase wealth through dividends or capital gains. Companies benefit by raising capital through stock offerings at a lower cost than other financing options. The stock market also benefits the overall economy by facilitating efficient allocation of capital and corporate governance. However, financial crises can negatively impact stock prices and dampen investment.
The document discusses the Indian capital market. It has two segments - the primary market where new securities are first issued to investors, and the secondary market which is the stock exchange where existing securities are traded. The key functions of the capital market are to mobilize savings, facilitate capital formation and economic growth. It discusses various instruments like equity shares, bonds, and methods of issuance like IPO, right issue, bonus issue etc. Important participants include brokers, banks, mutual funds. The regulator is SEBI and it oversees raising of capital and trading according to guidelines.
This document discusses the concepts and process of fundamental analysis for making investment decisions. It explains that fundamental analysis examines the intrinsic value of a company by analyzing the economy, industry, and company. The analysis involves 3 phases - evaluating the economy, industry life cycle stages (pioneering, expansion, stagnation), and company financial ratios to determine if the stock is under or overvalued compared to market price. Making investment decisions requires understanding these fundamental analysis concepts.
Presentation on Fundamental Analysis of Share/Security: Economic Analysis Bishakha12
The document analyzes the fundamental factors affecting the performance of Unilever Bangladesh. It finds that Unilever has reduced costs tremendously over the last four years through effective supply chain management. This includes negotiations with suppliers to reduce costs at each step of the supply chain. Analyzing economic variables like inflation rates over the period also shows why Unilever's product prices increased despite cost reductions. The company's performance is still dependent on broader economic and political stability factors in Bangladesh.
This document provides an overview of the Indian capital market. It defines capital markets as markets for trading long-term financial securities, where individuals and institutions can buy and sell debt and equity instruments. The capital market has a primary market for new security issuances and a secondary market for trading existing securities. It discusses the key participants in the market - issuers who raise capital, investors who provide capital, and intermediaries who facilitate transactions. The document also outlines the roles and functions of the capital market in facilitating capital formation, savings mobilization, and economic growth.
This document summarizes the efficient market hypothesis (EMH) in three sentences:
The EMH states that market prices fully reflect all available public information and adjust instantly to new information. It has three forms - weak, semi-strong, and strong - with each form incorporating more types of information. Most research supports the weak and semi-strong forms, finding that historical data and public information are reflected in prices, but the strong form is not supported as non-public information can be used to earn excess returns.
Fundamental analysis is a method of evaluating securities by examining related economic, financial, and political factors to measure a security's intrinsic value. Key factors analyzed include the company's earnings growth rate, risk exposure, and the economic environment and industry it operates in. Fundamental analysis involves analyzing the macroeconomic environment, industry characteristics, and individual company metrics like financial performance, management, and competitive position. The goal is to understand these factors' impact on investment returns and stock prices.
Difference between systematic and unsystematic riskSOJIBSABBIR
Systematic risk, also known as market risk, is uncertainty inherent to the entire market and consists of day-to-day stock price fluctuations. It includes interest, market, and inflation risks and is uncontrollable, arising from macroeconomic factors that affect many securities. Unsystematic risk is uncertainty from a specific company or industry and includes business and financial risks, which can be reduced through diversification. It is controllable and arises from micro-economic factors affecting individual securities.
- Fundamental analysis is the evaluation of a company or asset based on its financial statements and overall economic factors to determine its intrinsic value. It involves examining historical and present data along with financial forecasts to estimate future performance.
- There are two main types of fundamental analysis: macro analysis, which looks at broader economic and industry factors, and micro analysis, which analyzes individual companies and stocks.
- The fundamental analysis process typically involves a top-down approach starting with macro analysis of the overall economy and industry, then micro analysis of specific companies within industries. The goal is to identify underpriced or overpriced stocks based on their estimated intrinsic value.
1) Total risk of a security is composed of systematic risk, which stems from external market factors, and unsystematic risk, which is specific to a company.
2) Diversifying a portfolio by holding many securities with returns that are not perfectly positively correlated can reduce total risk through lowering unsystematic risk exposure.
3) The degree of risk reduction from diversification depends on the correlation between the returns of the securities in the portfolio. Perfectly negatively correlated securities eliminate risk, while perfectly positively correlated securities do not allow for risk reduction through diversification.
Stocks represent ownership in a company. As a shareholder, an individual owns a portion of the company's assets and earnings and has voting rights. There are two main types of stocks - common stock, which represents ownership and a claim on profits, and preferred stock, which guarantees fixed dividends. Stock prices fluctuate based on supply and demand and a company's performance. Individuals can purchase stocks through a brokerage or dividend reinvestment plan.
The Capital Asset Pricing Model (CAPM) uses beta to measure the non-diversifiable risk of a security and determine its expected return. CAPM assumes investors want to maximize returns and only consider systematic risk. It models expected return as the risk-free rate plus a risk premium based on the security's beta. The Security Market Line graphs this relationship between beta and expected return. Some researchers like Fama and French have expanded CAPM with additional size and value factors.
The document discusses India's financial system, which consists of three main parts: financial assets like loans and deposits, financial institutions like banks and mutual funds, and financial markets like the money market and capital market. It describes the evolution of India's financial system over three periods from 1949 to the present, noting the nationalization of banks in 1969, the financial repression of 1969-1991, and the major reforms beginning in 1991 in response to committee recommendations. The current system is largely deregulated and liberalized compared to the earlier regulated periods.
- The document discusses technical analysis, which uses patterns in stock prices and trading volume to predict future stock performance, rather than analyzing companies' financials.
- It outlines various technical analysis techniques like charting patterns, indicators like RSI and Bollinger Bands, and identifying support and resistance levels.
- Technical analysis is believed to be one of the oldest forms of security analysis and is still widely used today, though it also faces challenges from theories like the efficient market hypothesis.
Fundamental analysis and technical analysisMohammed Umair
This document discusses fundamental analysis techniques for evaluating securities. It defines fundamental analysis as focusing on underlying business factors like financials, management, and prospects to determine a security's value. The document outlines different levels of analysis, including analyzing the overall economy, individual industries, and specific companies. It provides examples of analyzing economic indicators, using Porter's Five Forces for industry analysis, evaluating competitors, and assessing profitability metrics. The goal of fundamental analysis is to answer questions about a company's growth, profits, competitive positioning, debt repayment ability, and accounting practices.
Treasury bills are short-term promissory notes issued by the government of India to finance its short-term borrowing needs. There are two types of treasury bills - ordinary bills which are freely tradable, and ad-hoc bills which are non-tradable and issued only to the RBI. Treasury bills are issued in 91-day, 182-day and 364-day maturities through weekly and fortnightly auctions. While treasury bills offer safety and liquidity, their yields tend to be low making them less attractive compared to other government securities.
A stock market or equity market is a public market for trading company stock and derivatives at agreed prices. Stocks are listed on stock exchanges, which are entities like the New York Stock Exchange. When a company issues stock, it raises money from investors in exchange for ownership stakes. Stock buyers own a claim on the company's assets and earnings. A stock exchange provides a market for trading stocks and bonds, and facilitates capital raising for companies. Major Indian stock exchanges include the Bombay Stock Exchange and National Stock Exchange, located in Mumbai.
Stock market indices are useful tools for understanding market trends and performance. The BSE SENSEX tracks 30 major companies on the Bombay Stock Exchange, with its base value set at 100 in 1978-1979. It is calculated using each company's free float market capitalization. Similarly, the NIFTY index tracks 50 major National Stock Exchange companies, with its base year being 1995 and base value at 1000. Both indices are weighted averages and act as benchmarks for measuring portfolio and economic performance in India.
Fundamental analysis is a method of evaluating securities that involves performing an analysis of the underlying company and industry. It examines factors like the overall economy, industry conditions, and the financial condition and management of companies to determine a company's intrinsic value. The analysis involves evaluating economic, industry, and company-specific factors to estimate future earnings and stock prices. Some key aspects of fundamental analysis include analyzing the economy, industry life cycles, and individual company financials and operations.
The document discusses stock markets and shares. It defines a stock market as a market for trading company stock and derivatives. It explains that shares represent fractional ownership in a company and shareholders have rights like voting and sharing in company profits. A company issues new shares to raise capital for projects or expansion. Share prices are determined by supply and demand on the stock exchange. Investors can analyze companies through fundamental analysis of financials or technical analysis of price trends and patterns. The stock market plays an important role in economies by facilitating business growth and mobilizing savings.
This Presentation is about the Financial Market in India.
Aim is to provide basic information regarding Stock market, Bombay Stock Exchange(BSE) and National Stock Exchange of India (NSEI).
The document discusses the Indian capital market. It has two segments - the primary market where new securities are first issued to investors, and the secondary market which is the stock exchange where existing securities are traded. The key functions of the capital market are to mobilize savings, facilitate capital formation and economic growth. It discusses various instruments like equity shares, bonds, and methods of issuance like IPO, right issue, bonus issue etc. Important participants include brokers, banks, mutual funds. The regulator is SEBI and it oversees raising of capital and trading according to guidelines.
This document discusses the concepts and process of fundamental analysis for making investment decisions. It explains that fundamental analysis examines the intrinsic value of a company by analyzing the economy, industry, and company. The analysis involves 3 phases - evaluating the economy, industry life cycle stages (pioneering, expansion, stagnation), and company financial ratios to determine if the stock is under or overvalued compared to market price. Making investment decisions requires understanding these fundamental analysis concepts.
Presentation on Fundamental Analysis of Share/Security: Economic Analysis Bishakha12
The document analyzes the fundamental factors affecting the performance of Unilever Bangladesh. It finds that Unilever has reduced costs tremendously over the last four years through effective supply chain management. This includes negotiations with suppliers to reduce costs at each step of the supply chain. Analyzing economic variables like inflation rates over the period also shows why Unilever's product prices increased despite cost reductions. The company's performance is still dependent on broader economic and political stability factors in Bangladesh.
This document provides an overview of the Indian capital market. It defines capital markets as markets for trading long-term financial securities, where individuals and institutions can buy and sell debt and equity instruments. The capital market has a primary market for new security issuances and a secondary market for trading existing securities. It discusses the key participants in the market - issuers who raise capital, investors who provide capital, and intermediaries who facilitate transactions. The document also outlines the roles and functions of the capital market in facilitating capital formation, savings mobilization, and economic growth.
This document summarizes the efficient market hypothesis (EMH) in three sentences:
The EMH states that market prices fully reflect all available public information and adjust instantly to new information. It has three forms - weak, semi-strong, and strong - with each form incorporating more types of information. Most research supports the weak and semi-strong forms, finding that historical data and public information are reflected in prices, but the strong form is not supported as non-public information can be used to earn excess returns.
Fundamental analysis is a method of evaluating securities by examining related economic, financial, and political factors to measure a security's intrinsic value. Key factors analyzed include the company's earnings growth rate, risk exposure, and the economic environment and industry it operates in. Fundamental analysis involves analyzing the macroeconomic environment, industry characteristics, and individual company metrics like financial performance, management, and competitive position. The goal is to understand these factors' impact on investment returns and stock prices.
Difference between systematic and unsystematic riskSOJIBSABBIR
Systematic risk, also known as market risk, is uncertainty inherent to the entire market and consists of day-to-day stock price fluctuations. It includes interest, market, and inflation risks and is uncontrollable, arising from macroeconomic factors that affect many securities. Unsystematic risk is uncertainty from a specific company or industry and includes business and financial risks, which can be reduced through diversification. It is controllable and arises from micro-economic factors affecting individual securities.
- Fundamental analysis is the evaluation of a company or asset based on its financial statements and overall economic factors to determine its intrinsic value. It involves examining historical and present data along with financial forecasts to estimate future performance.
- There are two main types of fundamental analysis: macro analysis, which looks at broader economic and industry factors, and micro analysis, which analyzes individual companies and stocks.
- The fundamental analysis process typically involves a top-down approach starting with macro analysis of the overall economy and industry, then micro analysis of specific companies within industries. The goal is to identify underpriced or overpriced stocks based on their estimated intrinsic value.
1) Total risk of a security is composed of systematic risk, which stems from external market factors, and unsystematic risk, which is specific to a company.
2) Diversifying a portfolio by holding many securities with returns that are not perfectly positively correlated can reduce total risk through lowering unsystematic risk exposure.
3) The degree of risk reduction from diversification depends on the correlation between the returns of the securities in the portfolio. Perfectly negatively correlated securities eliminate risk, while perfectly positively correlated securities do not allow for risk reduction through diversification.
Stocks represent ownership in a company. As a shareholder, an individual owns a portion of the company's assets and earnings and has voting rights. There are two main types of stocks - common stock, which represents ownership and a claim on profits, and preferred stock, which guarantees fixed dividends. Stock prices fluctuate based on supply and demand and a company's performance. Individuals can purchase stocks through a brokerage or dividend reinvestment plan.
The Capital Asset Pricing Model (CAPM) uses beta to measure the non-diversifiable risk of a security and determine its expected return. CAPM assumes investors want to maximize returns and only consider systematic risk. It models expected return as the risk-free rate plus a risk premium based on the security's beta. The Security Market Line graphs this relationship between beta and expected return. Some researchers like Fama and French have expanded CAPM with additional size and value factors.
The document discusses India's financial system, which consists of three main parts: financial assets like loans and deposits, financial institutions like banks and mutual funds, and financial markets like the money market and capital market. It describes the evolution of India's financial system over three periods from 1949 to the present, noting the nationalization of banks in 1969, the financial repression of 1969-1991, and the major reforms beginning in 1991 in response to committee recommendations. The current system is largely deregulated and liberalized compared to the earlier regulated periods.
- The document discusses technical analysis, which uses patterns in stock prices and trading volume to predict future stock performance, rather than analyzing companies' financials.
- It outlines various technical analysis techniques like charting patterns, indicators like RSI and Bollinger Bands, and identifying support and resistance levels.
- Technical analysis is believed to be one of the oldest forms of security analysis and is still widely used today, though it also faces challenges from theories like the efficient market hypothesis.
Fundamental analysis and technical analysisMohammed Umair
This document discusses fundamental analysis techniques for evaluating securities. It defines fundamental analysis as focusing on underlying business factors like financials, management, and prospects to determine a security's value. The document outlines different levels of analysis, including analyzing the overall economy, individual industries, and specific companies. It provides examples of analyzing economic indicators, using Porter's Five Forces for industry analysis, evaluating competitors, and assessing profitability metrics. The goal of fundamental analysis is to answer questions about a company's growth, profits, competitive positioning, debt repayment ability, and accounting practices.
Treasury bills are short-term promissory notes issued by the government of India to finance its short-term borrowing needs. There are two types of treasury bills - ordinary bills which are freely tradable, and ad-hoc bills which are non-tradable and issued only to the RBI. Treasury bills are issued in 91-day, 182-day and 364-day maturities through weekly and fortnightly auctions. While treasury bills offer safety and liquidity, their yields tend to be low making them less attractive compared to other government securities.
A stock market or equity market is a public market for trading company stock and derivatives at agreed prices. Stocks are listed on stock exchanges, which are entities like the New York Stock Exchange. When a company issues stock, it raises money from investors in exchange for ownership stakes. Stock buyers own a claim on the company's assets and earnings. A stock exchange provides a market for trading stocks and bonds, and facilitates capital raising for companies. Major Indian stock exchanges include the Bombay Stock Exchange and National Stock Exchange, located in Mumbai.
Stock market indices are useful tools for understanding market trends and performance. The BSE SENSEX tracks 30 major companies on the Bombay Stock Exchange, with its base value set at 100 in 1978-1979. It is calculated using each company's free float market capitalization. Similarly, the NIFTY index tracks 50 major National Stock Exchange companies, with its base year being 1995 and base value at 1000. Both indices are weighted averages and act as benchmarks for measuring portfolio and economic performance in India.
Fundamental analysis is a method of evaluating securities that involves performing an analysis of the underlying company and industry. It examines factors like the overall economy, industry conditions, and the financial condition and management of companies to determine a company's intrinsic value. The analysis involves evaluating economic, industry, and company-specific factors to estimate future earnings and stock prices. Some key aspects of fundamental analysis include analyzing the economy, industry life cycles, and individual company financials and operations.
The document discusses stock markets and shares. It defines a stock market as a market for trading company stock and derivatives. It explains that shares represent fractional ownership in a company and shareholders have rights like voting and sharing in company profits. A company issues new shares to raise capital for projects or expansion. Share prices are determined by supply and demand on the stock exchange. Investors can analyze companies through fundamental analysis of financials or technical analysis of price trends and patterns. The stock market plays an important role in economies by facilitating business growth and mobilizing savings.
This Presentation is about the Financial Market in India.
Aim is to provide basic information regarding Stock market, Bombay Stock Exchange(BSE) and National Stock Exchange of India (NSEI).
The document discusses the Indian stock market, including key stock exchanges and indices, major companies, sectors that affect the market, and factors that influence stock prices. It also outlines reasons for investing in the stock market like India's strong GDP growth and order books of companies. Lastly, it describes different ways to invest directly through a trading account or indirectly through mutual funds.
The document discusses the differences between stock markets and share markets, which essentially mean the same thing. It describes stocks as units of ownership in a company that can be traded, while shares are certificates of ownership issued by companies to raise funds. The stock market is an organized market for trading stocks and shares of government bodies and corporations. It also defines primary and secondary markets, as well as different types of stocks and indexes used in Indian stock markets like the BSE and NSE.
A tutorial to basics of stock markets, basically for newbie's. Explains what is stocks, how trading happens, kinds of trading and some basic terminologies.
Causal relationship between stock market and real economysammysammysammy
This is the powerpoint presentation of a research conducted on the causal relationship between stock market (that are nifty50 and sensex30 indices) and real GDP of India. The idea is to identify whether former Granger causes the latter or vice versa.
The document defines a stock exchange as an organization that assists, regulates, and controls trading of securities. It explains that stock exchanges provide a platform for companies to issue stock/shares to raise funds, and for stock brokers and traders to buy and sell stocks, bonds, and securities. The key functions of a stock exchange are to list companies, facilitate trading of securities, regulate market participants and transactions, and support price discovery.
The document discusses different types of economic systems, including pure market economies, pure command economies, traditional economies, and mixed economies. It describes the key characteristics of each type of economy, such as how economic decisions are made regarding what to produce, how to produce it, and who receives the goods and services. The document also briefly covers different political philosophies like capitalism, socialism, and communism that influence economic systems.
An empirical study of macroeconomic factors and stock market an indian persp...Saurabh Yadav
This document presents an empirical study analyzing the relationship between macroeconomic factors and the Indian stock market from 1990 to 2011. The study uses various econometric tools like unit root tests, cointegration tests, vector autoregression models, impulse response analysis, and Granger causality tests to analyze the impact of macroeconomic indicators like industrial production, money supply, inflation on the BSE Sensex index. It aims to contribute new insights on how regulatory changes in the Indian economy over this period impacted asset prices and whether domestic or global factors had a larger influence on the Indian stock market.
Impact of MacroEconomic Variables on National Stock ExchangeWaquar Khan
- The document is a project guide that analyzes the impact of macroeconomic variables like inflation and exchange rates on India's National Stock Exchange.
- It outlines the profile and purpose of NSE, describes the CNX Nifty index, and explains the research methodology used involving regression analysis.
- The analysis finds that inflation has a negative influence on NSE returns while exchange rates have a positive influence, with R-squared being 43.8%. It concludes there is a significant relationship between macroeconomic factors and stock market performance.
Inflation reduces the value of money over time. It is influenced by factors like food prices, fuel costs, commodities, wages and government policies. The consumer price index is a better measure of inflation than the wholesale price index. Moderate inflation of 3-5% is ideal for economic growth, while above 5% threatens the economy. High inflation increases interest rates, decreases investment and exports, and depreciates currency. It can cause wage-price spirals, unequal wealth distribution, and political instability. To control inflation, central banks tighten monetary policy and governments employ fiscal measures for long-term management of inflation.
Impact of macroeconomic variables on stock returnsMuhammad Mansoor
The document discusses the impact of macroeconomic factors on stock returns. It provides background information on financial markets, primary and secondary markets, and stock market returns. It then summarizes several empirical studies that have examined the relationship between macroeconomic variables like interest rates, inflation, GDP, exchange rates, and stock market returns in countries like Pakistan, Japan, Nigeria, and others. The studies found both positive and negative relationships between different macroeconomic factors and stock returns in various markets. The document aims to contribute to this area of research by examining the impact of macroeconomic variables on stock returns in the Pakistani stock market.
The document discusses different types of economic systems and concepts in business ownership and market economies. It explains that in a market economy, individuals and businesses decide what to produce based on supply and demand. When supply and demand are equal it reaches an equilibrium price and quantity. The US operates under a market economy where private individuals and groups make decisions rather than the government. It also discusses the concepts of fixed and variable costs that businesses consider to determine prices and profits.
This document provides an overview of the stock market and how to trade stocks in India. It discusses key terminology like brokers, Demat accounts, indexes, order types, and trading basics. The major stock exchanges in India are NSE and BSE. To start trading, one needs a Demat account with a broker and then can place buy and sell orders on a trading terminal. Fundamental and technical analysis are two common approaches for identifying trading opportunities.
The document provides information about Indian stock markets. It defines what a stock is as an instrument representing ownership in a corporation and a claim on its assets and profits. It then defines the stock market as a place where stocks and securities of companies are traded. It provides a brief history of stock markets including key dates and locations such as Amsterdam in 1602, London in 1698, and New York in 1792. It also discusses major Indian stock exchanges like Bombay Stock Exchange established in 1875 and National Stock Exchange established in 1992.
The document discusses various types of capital market investments including real estate, business enterprises, precious metals, and financial investments. It describes direct and indirect financial markets for making investments directly or through financial intermediaries like mutual funds. The key types of financial markets are the stock exchange, which is a marketplace for long-term investments in different market segments, and the money market for short-term investments in instruments like treasury bills. It provides an overview of the history and development of stock exchanges globally and in the subcontinent, including the major stock exchanges in Pakistan.
The document discusses the relationship between the stock market and the macroeconomy. It explains that the stock market and the overall economy influence each other in a two-way relationship. When stock prices rise, household wealth increases, leading consumers to spend more. This boosts aggregate demand and GDP. Conversely, a stronger economy leads to higher corporate profits, boosting stock prices. Shocks that impact either the stock market or the macroeconomy can reverberate onto the other through this relationship.
The document provides an introduction to stock markets and investing. It discusses key concepts such as stocks, bonds, indexes, market orders, short selling, and margin trading. It also outlines different market sectors including defensive sectors like utilities and cyclical sectors that are more sensitive to economic changes. Finally, it introduces the LHA Stock Market Game, where students will each receive $100,000 to invest and trade stocks against their classmates.
Fundamental analysis is an evaluation method for securities that attempts to measure a stock's intrinsic value by examining related economic, financial and other qualitative and quantitative factors. This includes analyzing everything from overall economy and industry conditions to individual companies' financial statements and management. The process involves a top-down approach looking at macroeconomic indicators or a bottom-up approach analyzing specific businesses. Fundamental analysis is used for long-term investment decisions and relies on financial metrics like earnings, expenses, assets and liabilities to evaluate performance.
This document provides an introduction to the stock market and the LHA Stock Market Game. It defines key market concepts like stocks, bonds, indexes and exchanges. It explains how to read stock quotes and factors that influence stock prices. The goal of the LHA Stock Market Game is for students to compete by investing a virtual $100,000 in stocks and tracking their portfolio value.
This document provides an introduction to the stock market and the LHA Stock Market Game. It defines key market concepts like stocks, bonds, indexes and exchanges. It explains how to read stock quotes and factors that influence stock prices. The goal of the game is for students to compete by investing a virtual $100,000 in stocks and tracking their portfolio value.
The document provides a weekly market review covering the period of May 8, 2015. It summarizes that in the US, stocks ended higher for the week despite falling earlier, in response to a positive jobs report on Friday. International markets also closed slightly higher. Treasury bond yields increased to five-month highs. Commodity indices were mixed for the week.
The document discusses various topics related to stock markets and business procurement. It defines key stock market terms like primary and secondary markets. It also explains the process of companies going public and being listed on stock exchanges. The document also outlines the purchasing process from identifying needs, supplier selection, negotiation, and evaluation. Key factors that influence business procurement like price, quality, and relationships are also summarized.
The document provides information on why learning about stocks is important and some basics of how the stock market works. It discusses different types of stocks like common and preferred stocks. It also defines key stock market terms like book value, earnings per share, price-earnings ratio, and beta that investors use to evaluate stocks. The document aims to educate readers on the stock market and different aspects of investing in stocks.
1. Financial markets allow individuals and organizations to exchange financial assets and funds through intermediation. Money markets deal in short term debt up to 1 year, while capital markets trade longer term equity and debt.
2. Financial institutions serve as intermediaries in these markets since they are imperfect. Major institutions include commercial banks, savings institutions, credit unions, finance companies, mutual funds, securities firms, hedge funds, insurance companies and pension funds.
3. Interest rates are determined by the interaction of supply and demand in the loanable funds market. Factors like expected inflation, economic growth, and money supply influence rates by shifting supply and demand curves. The term structure of interest rates shows the relationship between yields of different term securities.
The document discusses the recent fall in the Indian stock market. It provides 3 key reasons for the decline:
1) Negative signals from within India like high interest rates and economic slowdown.
2) Global market turmoil from the European and US debt crisis causing a decline in US stocks that spread worldwide.
3) Concerns around continued high unemployment and lack of immediate financial recovery in the US sparking fears of a recession.
The stock market indices across sectors like banking, infrastructure, IT, and healthcare all declined substantially over the past week.
The document discusses the efficient market hypothesis (EMH), which states that current stock prices fully reflect all available information. Under EMH, it is impossible for investors to consistently outperform the market because stock prices adjust rapidly to new information. However, some evidence suggests markets are not always efficient, as seen in crashes not explained by economic changes. While published reports may be reflected in prices already, the EMH remains useful as a benchmark for understanding market behavior.
This document provides an overview of investing in stocks, including:
1) It defines different types of securities like stocks, bonds, mutual funds, and outlines factors to consider when beginning to invest in stocks like a company's financials.
2) It explains why corporations issue common stock and why investors purchase common stock, focusing on potential dividends and stock appreciation.
3) It covers strategies for buying, selling, and classifying different types of stocks and factors that influence investment decisions like financial metrics and analysis theories.
Understand what and how impacts the market and influences the stock price of several companies. To know more or invest in stocks visit: www.karvyonline.com or call us on 18004198283.
The document provides an overview of market structures and investing. It discusses the four main types of market structure - perfect competition, monopolistic competition, oligopoly, and monopoly - and their key characteristics. It also covers various financial securities like bonds, CDs, stocks, and mutual funds; explains how the stock market works; and discusses important stock market indices and whether the current market is a bull or bear market.
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Evidence Based Practice 2
1. The evidence suggests that integrated physician practices use more evidenced-based care processes, provide more preventive health services, and offer more health promotion programs for the populations they serve than non-integrated practices. Medical groups involve physicians practicing exclusively as either salaried employees of the group or as partners. What are some reasons why these integrated practices may or may not be the most efficient ways to practice medicine considering the challenges facing health care organizations in the 21st century?
2. What is the purpose of a balanced scorecard? How is the balanced scorecard used to lead and manage an organization? How can the balanced scorecard be linked to organizational effectiveness as well as individual performance evaluation?
Chapter 2
Asset Classes and Financial Instruments
*
Describes the financial instruments traded in primary and secondary markets.
Discusses Market indexes. Discusses options and futures.
1. The Money Market- This is where the money stays money!
2-*
*
These are the various major classes of financial assets or securities.
Debt- Fixed income securities
Common Stock- Ownership
Preferred-Hybrid of fixed income and ownership
Derivative-Value based on the price of another asset.
special purpose, hedge; arbitrage; defer gain, short term speculation, etc.
Money Market InstrumentsTreasury BillsCertificates of DepositCommercial PaperBankers’ AcceptancesEurodollarsRepos and ReversesBroker’s CallsFederal FundsLIBOR (London Interbank Offer Rate)
2-*
Treasury BillsTreasury billsIssued byDenominationMaturityLiquidityDefault riskInterest typeTaxation
Federal Government
$100, commonly $10,000
4, 13, 26, or 52 weeks
Highly liquid
None
Discount
Federal taxes owed, exempt from state and local taxes
2-*
*
Certificates of Deposit (CD)Certificates of DepositIssued byDenominationMaturityLiquidityDefault riskInterest typeTaxation
Depository Institutions
Any, $100,000 or more are marketable
Varies, typically 14 day minimum
3 months or less are liquid if marketable
First $100,000 ($250,000) is insured
Add on
Interest income is fully taxable
2-*
*
Commercial PaperCommercial PaperIssued by
MaturityDenominationLiquidityDefault riskInterest typeTaxation
Large creditworthy corporations and financial institutions
Maximum 270 days, usually 1 to 2 months
Minimum $100,000
3 months or less are liquid if marketable
Unsecured, Rated, Mostly high quality
Discount
Interest income is fully taxable
New Innovation: Asset backed commercial paper is backed
by a loan or security. In summer 2007 asset backed CP
market collapsed when subprime collateral values fell.
2-*
*
Bankers Acceptances & EurodollarsBankers AcceptancesOriginates when a purchaser of goods authorizes its bank to pay the seller for the goods at a date in the future (time draft). When the purchaser’s bank ‘accepts’ the draft it becomes a contingent liabili ...
This document discusses fundamental analysis for investment purposes. It defines fundamental analysis as evaluating a security's intrinsic value based on external factors that could influence future price. The document outlines factors to consider in fundamental analysis including quantitative company financials, qualitative company/industry attributes, and macroeconomic, industry, and company specifics. It also describes different types of fundamental analysis and tools used for economic analysis in fundamental evaluation.
This document analyzes the fundamental factors affecting stock prices on the Indian stock market index SENSEX. It examines previous research on factors influencing stock markets in India and internationally. The paper identifies critical variables with a significant effect on stock price movements and aims to establish relationships between explanatory variables and stock prices. Factor analysis is used to condense variables into critical factors influencing stock prices. The analysis finds higher earnings, returns on investment, growth potential and favorable valuations positively impact stock prices, while higher risk and volatility have negative impacts. These factors can help investors, corporations and brokers make better investment decisions.
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The document discusses the concept of interest and how it relates to the financial system, even in a hypothetical scenario without money. It describes how savings, investment, and lending can occur through the exchange of goods and services, using the example of castaways on a deserted island. One castaway invests time to make a shovel, allowing greater future food production, while another borrows the shovel but must provide compensation due to risks like default or damage to the capital good. This hypothetical scenario parallels how interest, risk, and time preference work in a modern financial system.
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Digital, interactive art showing the struggle of a society in providing for its present population while also saving planetary resources for future generations. Spread across several frames, the art is actually the rendering of real and speculative data. The stereographic projections change shape in response to prompts and provocations. Visitors interact with the model through speculative statements about how to increase savings across communities, regions, ecosystems and environments. Their fabulations combined with random noise, i.e. factors beyond control, have a dramatic effect on the societal transition. Things get better. Things get worse. The aim is to give visitors a new grasp and feel of the ongoing struggles in democracies around the world.
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2. •Introduction
•Explaining Changes in Stock Prices
•How Stock Markets Affect the Economy
•The Fed and the Stock Market
•Rational Expectation and the Stock Market
3. INTRODUCTION
Firms raise funds in two ways: THROUGH
Debt finance - bonds and loans
Equity finance - through issues of stocks or shares.
Instead of paying predetermined amounts as bonds do,
stocks pay dividends in an amount decided by the firm
Choice depends on a host of various factors
4. STOCK INVESTMENT
• 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
• However, cash-flows from stock investment is not fixed – risky
asset vs fixed income asset
• When a firm issues new shares of stock through initial public
offerings
• sale of which generates funds for the firm
• newly issued shares can be re-sold in the secondary market
5. STOCK MARKET
Investment in equity/stocks
represents ownership of a corporation
NO promised returns
grants right to share in firm’s assets and earnings, if any
Investors are entitled to a particular percent of the firm’s after
tax profit
Retained earnings - firms do not pay all their after-tax profit to
share holders, some is kept for later use of the firm
Dividends - The part of profit distributed to share holders
Aside from dividends, usually more important reason to holding
stocks is to enjoy capital gains – return someone gets when they
sell a stock at a higher price than they paid for it
6. Stock Market
Stock market activity involves mainly the trading of issued
securities rather than the exchange of financial claims for new
capital
Virtually all the shares traded in the stock market are
previously issued- trading does not involve the firm that issued
the stock
But the firm still concerned about the price of its previously
issued shares
1. The firm’s owners-current stockholders-want high share prices because
that is the price they can sell in the market
2. Previously issued shares are perfect substitute of new public offerings -
firm cannot expect to receive higher price for its new shares than the going
price on its old shares
7. Tracking the stock market
Financial market is so important that stocks and bonds are
monitored on a continuous basis
You can find out the value of a stock instantly just by checking
with a broker or logging onto a website
Daily news paper or specialized financial publication such as
Wall Street Journal or Financial Times report daily information
Tracking the stock market indices:
Benchmark index: showing the overall performance of a
particular stock market
Sectoral index: showing the performance of certain sector in the
economy, for eg. technology, construction, consumer product,
finance, etc
8. Tracking..
Tracking the stock market index
Dow Jones Industrial Average (DJIA)-tracks prices of 30 of the
largest companies; Oldest and most popular average
Broader Standard & Poor’s 500 (S&P 500)- Another popular
average
NASDAQ index tracks share prices of about 5,000 mostly newer
companies whose shares are traded on NASDAQ stock exchange
Often, stock market averages will rise and fall at the same
time, sometimes by the same percentage
9. STOCK MARKET INVESTORS
Direct holdings by HOUSEHOLDS represent the largest portion
of U.S. stock holdings
From US$1 trillion in 1980 to US$5.5 trillion in 2006
Proportion-wise, however, declined from 70.5% to 26.6%
There is a phenomenal growth in other holdings
Investments by pension funds
Mutual funds (from 2.9% to 24%)
Foreign investors (from 5.2% to 18.6%)
11. 2. Explaining Changes in Stock Prices—
Step #1: Characterize The Market
• Price of a share of stock—like any other— is determined
in a competitive market
• 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
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
12. Step #2: Find The Equilibrium
Figure 1 presents a supply and demand diagram for shares of
Corporation X
On any given day, number of Corporation X shares in existence is
just the number that the firm has issued previously
Just because 302 million shares of Corp X 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
13. Figure 1: The Market For Shares of
Corporation X
Number of Shares
Price per Share
E
•S
$120
90
60
D
302 million
14. Step #3: What Happens When Things Change?
The changes observed in a stock’s price are mainly caused by
shifts in demand curve
What causes the sudden changes in demand for a share of stock?
In almost all cases, it is one or more of the following three factors
1. 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
1. 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
1. 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)
15. Step #3: What Happens When Things Change?
• Example: expectations of a future interest rate change
results in change/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
16. Figure 2a: Shifts in the Demand for Shares
Curve
Number of Shares
Price
per Share •S
$75
60
D2
D1
(a)
298 million
The demand curve shifts rightward when new
information causes expectations of:
• higher future profits
• economic expansion
• lower interest rates
17. Figure 2b: Shifts in the Demand for Shares
Curve
45
D3
Number of Shares
Price
per Share
•S
60
D1
298 million
(b)
The demand curve shifts leftward when
new information causes expectations of:
• lower future profits
• recession
• higher interest rates
18. Step #3: What Happens When Things Change?
Prices can also change due to shifts in supply curve
Supply curve for a corporation’s shares shifts rightward
whenever
1.New round of public offering
2.Stock split:
-When a company divides its existing shares into multiple shares. Although the
number of shares outstanding increases by a specific multiple, the total dollar
value of the shares remains the same compared to pre-split amounts.
-The most common split ratios are 2-for-1 or 3-for-1, which means that the
stockholder will have two or three shares for every share held earlier
3. Large sell-off by institutional investors
19. Factors that Affect Stock PricesFactors that Affect Stock Prices
1. ECONOMIC FACTORS
Interest rates
Most of the significant stock market declines occurred when
interest rates increased substantially
Bonds are better investment option: high interest rate, price of
bonds decline
Exchange rates
Foreign investors purchase U.S. stocks when dollar is weak or
expected to appreciate
Stock prices of U.S. companies also affected by exchange rates
Income or GDP
Expectation of lower income reduces stock prices
Flight to quality to safer fixed income assets
20. Factors that Affect Stock PricesFactors that Affect Stock Prices
2. FIRM-SPECIFIC FACTORS/FIRM FUNDAMENTALS
Expected +NPV investments
Dividend policy changes
Significant debt level changes
Stock offerings and repurchases
Earnings surprises
Acquisitions and divestitures/divestment (a strategy to
remove some of a group's assets under its current business
portfolio)
21. Factors that Affect Stock Prices
3. MARKET-RELATED FACTORS
January effect – general increase in stock price in January
Noise trading
Trading by uninformed investors pushes stock price away from
fundamental value
Trends
Technical analysis
Repetitive patterns of price movements
22. Factors that Affect Stock PricesFactors that Affect Stock Prices
Integration of factors affecting stock prices
Evidence on factors affecting stock prices
Fundamental factors influence stock prices, but they do
not fully account for price movements
Smart-money investors
Noise traders
Excess volatility
Indicators of future stock prices
Things that affects cash flows and required returns
Variance in opinions about indicators
24. The Two-Way Relationship Between The Stock Market and the
Economy
Stock Market Macroeconomy
3. How the Stock Market Affects the Economy?
25. How the Stock Market Affects the Economy
On October 19, 1987, there was a dramatic drop in the stock market
Dow Jones Industrial Average fell by 508 points—a drop of 23%— about
$500 billion in household wealth disappeared
“The Black Monday”
The Fed intervene by offering discount loans
Avoiding non-bank panic which could result in systemic panic
26. •26 of 41
How Stock Market Affects the EconomyHow Stock Market Affects the Economy
1. Consumer: An increase in stock prices causes an
increase in wealth, and consequently an increase in
consumer spending – WEALTH EFFECT
2. Businesses: 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 –
TOBIN-Q EFFECT
27. The Wealth Effect
Positive relationship between stock price and households’
wealth
When stock prices rise, so does household wealth
What do households do when their wealth increases?
Typically, they increase their spending-consumption; multiplier effect
Link between stock prices and consumer spending
Autonomous consumption spending tends to move in same direction as
stock prices
When stock prices rise (fall), autonomous consumption spending rises
(falls)
28. The Wealth Effect and Equilibrium GDP
Autonomous consumption is a component of total spending
The wealth effect: Changes in stock prices—through the wealth
effect—cause both equilibrium GDP and price level to move in
same direction
An increase in stock prices will raise equilibrium GDP and price level
While a decrease in stock prices will decrease both equilibrium GDP and
price level
29. The Wealth Effect and Equilibrium GDP
How important is wealth effect?
Economic research shows that marginal propensity to consume out of
wealth is between 0.03 and 0.05
Change in consumption spending for each one-dollar rise in wealth
As a rule of thumb, a 100-point rise in DJIA—which generally
means a rise in stock prices in general—causes household
wealth to rise by about $100 billion
This rise in household wealth will increase autonomous consumption
spending by between $3 billion and $5 billion—we’ll say $4 billion
Rapid increases in stock prices can cause significant positive
demand shocks to economy, shocks that policy makers cannot
ignore
Similarly, rapid decreases in stock prices can cause significant negative
demand shocks to economy, which would be a major concern for
policy makers
30. Effect of Higher Stock Prices on the EconomyEffect of Higher Stock Prices on the Economy
(a) (b)
Y1 Y2
Real GDP
AggregateExpenditure
AEhigher stock prices
Real GDP
Price
Level
Y1Y3Y2
AS
45°
AElower stock prices
ADhigher stock
ADlower stock
P1
P2
31. How the Economy Affects the Stock
Market
• 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
• In typical expansion (recession), higher (lower) profits and
stockholder optimism (pessimism) cause stock prices to rise
(fall)
32. What Happens When Things Change?
Figure 5 illustrates three different types of changes we
might explore
A change might have most of its initial impact on the
overall economy, rather than the stock market
There might be a shock that initially affects stock
market
Shock could have powerful, initial impacts on both
stock market and overall economy
33. Three Types of Shocks
Shock to both
stock market and
macroeconomy
Shock to
macroeconomy
Shock to
stock market
Stock Market Macroeconomy
34. A Shock To the Economy and the Stock Market:
The High-Tech Boom of the 1990s
1990s—especially second half—saw dramatic rise in
stock prices
Growth in real GDP averaged 4.2% annually from 1995-2000
In part, economic expansion and rise in stock prices were
reinforcing
Each contributed to the other
Internet had a direct impact on stock market through its
effect on expected future profits of U.S. firms
At the same time, technological revolution was having a
huge impact on overall economy
35. A Shock To the Economy and the Stock Market:
The High-Tech Boom of the 1990s
Faced with these demand shocks, Federal Reserve would
ordinarily have raised its interest rate target to prevent
real GDP from exceeding potential output
Technological changes of 1990s were an example of a
shock to both stock market and economy
Result was a market and an economy that were feeding on each
other, sending both to new performance heights
Was this a good thing?
Yes, and no
In spite of all this good news, there were dark clouds on
horizon
36. A Shock to the Economy and the Stock Market:
The High-Tech Bust of 2000 and 2001
The market—especially high-tech NASDAQ stocks—began to decline in
early 2000
Both economy and market were being affected by several events
During 1990s, there had been an investment boom
Businesses rushed to incorporate the internet into factories, offices, and
their business practices in general
Fed may have played a role as well
Decline in investment—and the recession it caused—can be regarded
as a shock to economy
In addition, there was a direct shock to market
A change in expectations about the future
Unfortunately, in late 2000 and early 2001, reality set in
40. 4. The Fed and the Stock Market
Experience of late 1990s and early 2000s raised some
important questions about relationship between Federal
Reserve and stock market
In 1995 and 1996, Greenspan and other Fed officials
began to worry that share prices were rising out of
proportion to the future profits they would be able to
deliver to their owners
In this view, market in late 1990s resembled stock
market in 1920s, which is also often considered a bubble
41. The Fed and the Stock Market
In 1996, when Alan Greenspan first made his “IRRATIONAL
EXUBERANCE” speech: believed that the stock market was in midst of a
speculative bubble
Fed would be forced to intervene to prevent wealth effect—this time
in a negative direction—from creating a recession
In mid-1990s, Greenspan tried to “talk the market down” by letting
stockholders know that he thought share prices were too high
Implied threat: If stocks rose any higher, Fed would raise interest rates and
bring them down
It didn’t work: As 1990s came to a close, and the stock market
continued to soar, Fed faced a new problem - Wealth effect
42. The Fed and the Stock Market
• Fed continued to raise interest rates to rein in the economy,
– By slowing economic growth and growth in profits
– Through direct effect of higher interest rates on stocks; Fed also
brought down stock prices
• By 2001, high-tech bust, recession of 2001, and attacks of
September 11 brought criticism to an end
• As the economy began a slow expansion, in 2002 and early
2003, Fed kept the interest rate low
– Unresolved question: Who should be setting the general level of share
prices—millions of stockholders who buy and sell shares, or Federal
Reserve?
43. The Fed’s Problem In 2000: An AS-AD View
Real GDP
Price
Level
Y1 Y2
(a)
P1
AD2
A
BP2
AD1
AS AS1
AS2
A AD2
AD1
(b)
Real GDP
P1
P2
Y1 Y2
B
CP3
Price
Level
If output exceeds potential, the
self-correcting mechanism will
raise the price level further
Wealth effect of rising
stock prices shifts AD
rightward, raising real
GDP and the price level
44. Figure 7: The Fed’s Problem in 2000: A
Phillips Curve View
A
C
B
D
4%5%
2.5%
5.0%
1.5%
PC1PC2
. . . or recession
Unemployment
Rate
Inflation
Rate
A
4%
2.5%
PC1
UN?
(a) (b)Inflation
Rate
If the natural rate of
unemployment is 4%, the
Fed can keep the economy
at point A in the long run
Unemployment
Rate
UN?
But if the natural
rate is above 4%
the Phillips curve
will shift upward
and the Fed must
choose between
higher inflation . . .
45. The Fed and the Stock Market
According to Bernanke and Kuttner (2004), on “What Explains
the Stock Market’s Reaction to Federal Reserve Policy?”
Understanding the effect of monetary policy on stock prices is
fundamental to understand the transmission mechanism of monetary
policy through the wealth effect
Analyze the effect of unexpected Fed funds rate changes, as proxied by the
Fed funds future contracts, on various measures of stock market
performance:
46. The Fed and the Stock Market
FINDINGS:FINDINGS:
1. The market responds much more strongly to surprises than expected
actions.
1. Stock prices may respond to unexpected funds rate increases because of:
expected future dividends, real interest rates, and expected future excess
returns
2. The response of equity prices to monetary policy is not through effects on the
real interest rate, but appears to come through its effects on expected future
excess returns
2. A surprise 25 basis point rate decrease leads to a 1.3 percent gain in the
index.
3. Differential impact of monetary policy: construction sector presents the
largest coefficient. Mining and utility sectors the smallest.
47. •47 of 35
Making (Some) Sense of the News:
Why the Stock Market Moved
Yesterday and Other Stories
Here are some quotes from the Wall Street Journal from April 1997 to
August 2001. Try to make sense of them, using what you’ve just
learned:
April 1997.Good news on the economy, leading to an increase in
stock prices: “Bullish investors celebrated the release of market-
friendly economic data by stampeding back into stock and bond
markets, pushing the Dow Jones Industrial Average to its second-
largest point gain ever and putting the blue-chip index within
shooting distance of a record just weeks after it was reeling.”
December 1999.Good news on the economy, leading to a decrease
in stock prices: “Good economic news was bad news for stocks and
worse news for bonds. . . . The announcement of stronger-than-
expected November retail-sales numbers wasn’t welcome.
Economic strength creates inflation fears and sharpens the risk that
the Federal Reserve will raise interest rates again.”
48. •48 of 35
Making (Some) Sense of the News: Why the
Stock Market Moved Yesterday and Other
Stories
September 1998. Bad news on the economy, leading to an
decrease in stock prices: “Nasdaq stocks plummeted as
worries about the strength of the U.S. economy and the
profitability of U.S. corporations prompted widespread
selling.”
August 2001. Bad news on the economy, leading to an
increase in stock prices: “Investors shrugged off more gloomy
economic news,
and focused instead on their hope that the worst is now over
for both the economy and the stock market. The optimism
translated into another 2% gain for the Nasdaq Composite
Index.”
49. Computing the Price
of Common Stock
Valuing common stock is, in theory, no different from
valuing debt securities: determine the future cash
flows and discount them to the present at an
appropriate discount rate.
We will review FOUR different methods for valuing
stock, each with its advantages
and drawbacks.
50. Computing the Price of Common Stock:
(1) The One-Period Valuation Model
Simplest model, just taking using the expected
dividend and price over the next year.
51. Computing the Price of Common Stock: (1) The
One-Period Valuation Model (cont..)
What is the price for a stock with an expected dividend
and price next year of $0.16 and $60, respectively? Use a
12% discount rate
Answer:
52. Computing the Price of Common Stock:
(2) The Generalized Dividend Valuation
Model
Extended to any number of periods (similar concept
with the one-period dividend model
Having the assumption that the stock pays (or will
pay) some dividends. Hence the price is the PV of the
dividends…
53. Computing the Price of Common Stock:
(3) The Gordon Growth Model
Same as the previous model, but it assumes that
dividend grow at a constant rate, g. That is,
55. The model is useful, with the following assumptions:
Dividends do, indeed, grow at a constant rate forever
The growth rate of dividends, g, is less than the
required return on the equity, ke.
56. Computing the Price of Common Stock:
(4) Price Earnings Valuation Method
The price earnings ratio (PE) is a widely watched
measure how much the market is willing to pay
for $1.00 of earnings from
the firms.
High PE have 2 interpretations:
- Higher than ave may mean the market is expected earnings to rise in the
future. Eventually PE will return to normal level
- -High PE may indicate market’s perception that the firms earnings are low
risk and willing to pay premium for it
57. Computing the Price of Common Stock: The
Price Earnings Valuation Method
If the industry PE ratio for a firm is 16,
what is the current stock price for a firm
with earnings for $1.13 / share?
Answer:
Price = 16 × $1.13 = $18.08
58. The price earning valuation
method
FORMULA
P/E = Market value per share (price) / Earnings
per share
where,
Earnings per share = Company earnings (net profit) over the last 12
months divided by the number of shares in circulation
59. The price earning valuation
method
FORMULA
Market value per share (price) =
P/E * Earnings per share
60. The price earning valuation
method
Important to note:-
i) P/E multiple shows HOW MUCH investors are
willing to pay per dollar of earnings – higher P/E,
investors anticipate higher growth in the future
ii) It is more useful to compare P/E of one company
to another within SAME industry
iii) Loss making company do not have any P/E –
why?
61.
62.
63. 5. RATIONAL EXPECTATION
THEORY AND THE STOCK MARKET
Stock valuations largely dependent on EXPECTATIONS regarding
(i) cashflows (ii) risk
Important role of expectations: the RET is currently the most
widely used theory to describe the formation of business and
consumer expectations
Earlier theory: Adaptive expectations: changes in expectations
occur slowly overtime due to past experience
Now: RET:
1. Expectations will be identical to optimal forecasts (the best guess
of the future) using all available information (Muth, 1961)
2. Even though RE equals optimal forecast using all available
information, a prediction based on the RET may not always be
perfectly accurate
64. 5. RATIONAL EXPECTATION
THEORY AND THE STOCK MARKET
Relating this to the Efficient Market Hypothesis:
Current price in a financial market will be set so that the
optimal forecast of a security’s return using all available
information equals the security’s equilibrium return
In an efficient market, a security’s price fully reflects all
available information
65. 5. RATIONAL EXPECTATION
THEORY AND THE STOCK MARKET
Evidence in favor of market efficiency
1. Performance of Investment Analysts and Mutual Funds
It is impossible to beat the market: when purchasing a security, investors
cannot expect to earn an abnormal high return, a return greater than
equilibrium return
Having performed well in the past does not indicate that an investment
adviser will perform well in the future
2. Random-walk behaviour of stock prices
Stock price mostly follow a random walk-future changes in stock price is
unpredictable
Test: Long memory properties
66. Bubbles, Fads, and Stock Prices
Stock prices are NOT always equal to their
fundamental value, or the present value of
expected dividends.
Rational speculative bubbles occur when stock
prices increase just because investors expected
them to.
Deviations of stock prices from their
fundamental value are called fads.
•66 of 35
67. Anomalies in the Stock Market
Anomalies are empirical results that seem to be inconsistent
/unexplained by the theories of asset-pricing behavior.
Puzzling behavior of stock market as it does not conform with the
predictions of accepted models of asset pricing
They indicate either market inefficiency (profit opportunities) or
inadequacies in the underlying asset-pricing model: contradict the
EMH
Some examples are
1. The Size effect
2. The “Incredible” January Effect
3. P/E Effect
4. Day of the Week (Monday Effect)
68. 1. The Size Effect
Small firm effect
In the early 1980’s, a number of studies found that the
stocks of small firms typically OUTPERFORM (on a risk-
adjusted basis) the stocks of large firms
This is even true among the large-capitalization stocks
within the S&P 500: smaller (but still large) stocks tend to
outperform the really large ones
71. •71
Examine the historical performance of portfolios formed by
dividing the NYSE stocks into 10 portfolios each year
according to firm size (i.e., the total value of outstanding
equity).
Average annual returns between 1926 and 2006 are
consistently higher on the small-firm portfolios. The
difference in average annual return between portfolio 10
(with the largest firms) and portfolio 1 (with the smallest
firms) is 8.86%.
The small-firm effect
73. •73
Some explanations:
The smaller-firm portfolios tend to be riskier. But even when
returns are adjusted for risk using the CAPM, there is still a
consistent premium for the smaller-sized portfolios
Thus, while size per se is not a risk factor, it perhaps might
act as a proxy for the more fundamental determinant of risk.
Theories: tax issues, low liquidity of small firm stocks, large
information costs in evaluating small firms, inappropriate
measurement of risk for small firm stocks
This pattern of returns may thus be consistent with an
efficient market in which expected returns are consistent
with risk
1. The Size Effect
74. 2. The “Incredible” January Effect
Stock prices tend to experience abnormal price rise from
Dec to January that is predictable, thus inconsistent with
the random walk behavior
Stock returns appear to be higher in January than in
other months of the year
It may also be related to end of year tax selling
Investor has incentive to sell stocks before year-end
(reducing price) because they can take capital losses on
their tax return and reduce their tax liability
Then repurchase in January (increasing price)
75. •75
The January effect is tied to tax-loss selling at the end of the
year:
Many people sell stocks that have declined in price during the
previous months to realize their capital losses before the end of
the tax year
Such investors do not put the proceeds from these sales back
into the stock market until after the turn of the year. At that point
the rush of demand for stock places an upward pressure on
prices that results in the January effect
The evidence shows that the ratio of stock purchases to sales of
individual investors reaches an annual low at the end of
December and an annual high at the beginning of January
2. The “Incredible” January Effect
76. 3. The P/E Effect
• P/E ratio: the ratio of a stock’s price to its earnings per share.
It has been found that portfolios of “low P/E” stocks generally
outperform portfolios of “high P/E” stocks: Portfolios of low
P/E ratio stocks have higher returns than do high P/E
portfolios
• This may be related to the size effect since there is a high
correlation between the stock price and the P/E: It may be
that buying low P/E stocks is essentially the same as buying
small company stocks.
77. •77
Possible explanation:
• The returns are not properly adjusted for risk
•If two firms have the same expected earnings, then the riskier
stock will sell at a lower price and lower P/E ratio
•Because of its higher risk, the low P/E stock also will have
higher expected returns
• Thus, unless the CAPM beta fully adjusts for risk, P/E
will act as a useful additional descriptor of risk, and will
be associated with abnormal returns if the CAPM is
used to establish benchmark performance
3. The P/E Effect
78. 4. The Day of the Week Effect
• Based on daily stock prices from 1963 to 1985, Keim
(1984) found that returns are higher on Fridays and
lower on Mondays than should be expected.
• This is partly due to the fact that Monday returns actually
reflect the entire Friday close to Monday close time
period (weekend plus Monday), rather than just one day.
• However, after the stock market crash in 1987, this effect
disappeared completely and Monday became the best
performing day of the week between 1989 and 1998.
79. 5. Market Over-Reaction
• Stock prices may over-react to news announcements and
pricing errors are corrected only slowly
• Also related to excessive volatility: fluctuations in stock
prices may be much greater that is warranted by
fluctuations in their fundamental value
• Shiller (1981) along with other studies seemed to produce
a consensus that stock market prices appear to be drivenstock market prices appear to be driven
by factors other than fundamentalsby factors other than fundamentals