|
The stock market is endlessly fascinating to millions of people. CNBC, the cable TV channel that bases most of its programs on the stock market, is one of the most popular channels on cable. Why? Because the stock market is just about the only way that the average person has to "beat the bank". Average return on investments in the stock market over the last century has exceeded 10%, even though that includes the Great Depression of the 1930s, and the bear market of the past three years. ( A bear market is a market in which most prices are going down. A bull market is a market in which most prices are going up. There is no time, however, when all prices go the same way.) The mechanism of the publicly traded corporation allows everyone to buy a little piece of Microsoft, General Electric, Johnson and Johnson or other famous company and to share in the fortunes of that company for good or ill.
In addition, since the 401(k) plan was created in 1978, even people who were never interested in the stock market have necessarily become interested. Prior to the 401(k), and to a lesser extent, the IRA, most individuals still didn't invest. Those companies that paid pensions managed the investments of the funds, and the employee got a percentage of some pay base after staying with the company for 30 years. With the 401(k), the investment decision was suddenly in the hands of the individual employee, most of whom were ill-equipped to make investment decisions. Some of the matching money in these 401(k) plans was in the form of stock in the employing company, which most employees tend to just hold, not making a real portfolio decision. Unfortunately, by not making a decision, they are by default deciding to concentrate in their own company's stock, not a good portfolio strategy.
What all this means to you is that even if you never become a corporate financial manager worried about the price of your company's stock as part of your job, you will probably be worrying about your company's stock price anyway. Therefore, it pays for you to learn how the markets work and something about what determines the price of a stock. Then when you make a decision about your 401(k), you won't be making the decisions (or not making a decision) out of ignorance.
Since this is a course in Corporate Finance, the point of view of your textbook is as a corporate manager whose job it is to maximize shareholder value. When you finish the chapter, you should be able to
1. DESCRIBE and EXPLAIN how stock prices depend on future dividends and dividend growth.
2. CALCULATE the value of a stock based on its projected dividends and growth.
3. EXPLAIN how corporate directors are elected to office and the difference between the various kinds of stock and voting rights of shareholders.
4. INTERPRET the stock market price reporting pages in the financial press.
5. EXPLAIN how the various stock markets work, including the difference between the methods of the New York Stock Exchange and the NASDAQ.
This is a short chapter, but it is rich in information. In subsequent courses, such as Portfolio Analysis or Portfolio Management, this information will be vital.
Key terms in this Chapter:
Cash flows
Growth stocks
Zero growth
Constant growth
Dividend growth model
Dividend yield
Capital gains yield
Common stock
Shareholder rights
Cumulative voting
Straight voting
"Buying the election"
Proxy voting
Proxy
Classes of Stock
Dividends
Preferred stock
Stated value
Cumulative dividends
Noncumulative dividends
Primary market
Secondary market
Dealer
Broker
Member
Commission brokers
Specialist
Floor brokers
SuperDOT system
Floor traders
Order flow
Specialist's post
Nasdaq
Inside quotes
|
|
