The goal of this chapter is twofold: To examine the link between money growth and inflation in order to clarify the role of money in monetary policy, and to explain the logic underlying central bankers’ focus on interest rates. | Chapter 20 The Market for Corporate Stock Learning Objectives To learn about the characteristics of common and preferred corporate stock. To compare and contrast the roles and functions of the organized stock exchanges and the over-the-counter market. To explore the issue of market efficiency. Introduction to the Stock Market Equity is a certificate representing ownership of a corporation. It grants the right to share in the firm’s assets and earnings, if any. Stock market activity involves mainly the trading of issued securities rather than the exchange of financial claims for new capital. Nevertheless, the stock market has a significant impact on the expectations of businesses when planning future investments. Characteristics of Corporate Stock All corporate stock represents an ownership interest in a corporation, conferring on the holder a number of rights as well as risks. Common stock represents a residual claim against the assets of the issuing firm, entitling the owner to . | Chapter 20 The Market for Corporate Stock Learning Objectives To learn about the characteristics of common and preferred corporate stock. To compare and contrast the roles and functions of the organized stock exchanges and the over-the-counter market. To explore the issue of market efficiency. Introduction to the Stock Market Equity is a certificate representing ownership of a corporation. It grants the right to share in the firm’s assets and earnings, if any. Stock market activity involves mainly the trading of issued securities rather than the exchange of financial claims for new capital. Nevertheless, the stock market has a significant impact on the expectations of businesses when planning future investments. Characteristics of Corporate Stock All corporate stock represents an ownership interest in a corporation, conferring on the holder a number of rights as well as risks. Common stock represents a residual claim against the assets of the issuing firm, entitling the owner to share in the net earnings of the firm when it is profitable and to share in the net market value (after all debts are paid) of the company’s assets if it is liquidated. Characteristics of Corporate Stock Preferred stock carries a stated annual dividend expressed as a percent of the stock’s par value. Preferred stockholders have a prior claim over the firm’s assets and earnings relative to the claims of common stockholders, although creditors must still be paid first. Preferred shares generally provide less income but are less risky than common stock. Stock Market Investors Stock Market Investors Explaining Stock Values Recent research suggests that much of the variability in stock prices, though not all, can be explained by a relatively simple valuation model: S0 = today’s market price per share of stock E(Dt) = expected future dividend flows per share r = the default-free rate of interest k = the premium for bearing equity risk Explaining Stock Values If a corporation’s dividend .
