Chapter 8 provides knowledge of stocks, stock markets, and market efficiency. The goals of this chapter are: To try to make sense of the stock market, to show what fluctuations in stock value mean for individuals and for the economy as a whole, to look at a critical connection between the financial system and the real economy, explain why we sometimes have bubbles and crashes. | Chapter Eight 8- Introduction By giving individuals a way to transfer risk, stocks supply a type of insurance enhancing our ability to take risk. Companies use stocks as a way to obtain financing. Stocks are a central link between the financial works and the real economy. Stocks tell us the real value of a company. Stocks allocate scarce resources. 8- Introduction During a week in 1929, the New York Stock Exchange lost more than 25 percent of its value. This marked the beginning of the Great Depression. In October 1927, prices fell nearly 30 percent in one week. In the 1990’s stock prices increased nearly fivefold, and we forgot about the black Octobers. 8- Introduction From January 2000 to the feel after the Sept. 11, 2001 terrorist attacks, the Dow Jones Industrial Average fell more than 30 percent. During the same period, the Nasdaq composite index fell 70 percent and has remained low ever since. This was dubbed the “Internet bubble”. The recent financial . | Chapter Eight 8- Introduction By giving individuals a way to transfer risk, stocks supply a type of insurance enhancing our ability to take risk. Companies use stocks as a way to obtain financing. Stocks are a central link between the financial works and the real economy. Stocks tell us the real value of a company. Stocks allocate scarce resources. 8- Introduction During a week in 1929, the New York Stock Exchange lost more than 25 percent of its value. This marked the beginning of the Great Depression. In October 1927, prices fell nearly 30 percent in one week. In the 1990’s stock prices increased nearly fivefold, and we forgot about the black Octobers. 8- Introduction From January 2000 to the feel after the Sept. 11, 2001 terrorist attacks, the Dow Jones Industrial Average fell more than 30 percent. During the same period, the Nasdaq composite index fell 70 percent and has remained low ever since. This was dubbed the “Internet bubble”. The recent financial crisis lead to the stock market roughly halving in value by early 20009 from its 2007 value. 8- Introduction The subsequent rebound from the trough has been the sharpest since the Great Depression. However, despite all of this, stock prices tend to rise steadily and slowly, collapsing only on rare occasions when normal market mechanisms are out of alignment. 8- Introduction The goals of this chapter are: To try to make sense of the stock market. To show what fluctuations in stock value mean for individuals and for the economy as a whole. To look at a critical connection between the financial system and the real economy. Explain why we sometimes have bubbles and crashes. 8- The Essential Characteristics of Common Stock Stocks, also known as common stock or equity, are shares in a firm’s ownership. Stocks first appeared in the 16th century as a way to finance voyages of explorers. The idea was to spread the risk through joint-stock companies, organizations that .
