6E1_ Stock_Prices

6E1_ Stock_Prices - Stock Prices Readings: Zagorsky Chapter...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style 4/18/11 Stock Prices Readings: Zagorsky Chapter 3
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4/18/11 Introduction How and why do macroeconomic events cause stock prices to go up and down? Honest Answer: No one really knows. One of the greatest economists of all time, John Maynard Keynes in his 1936 book, The General Theory of Employment Interest and Money believed there were “animal spirits” that drove people to waves of optimism or pessimism in the
Background image of page 2
4/18/11 Why Is It Important? Financial markets are where many people keep their wealth/savings. Key idea “MPC out of Wealth”
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4/18/11 Stock Prices Key idea driving stocks prices are profits. Profits are simply the difference between the revenue a firm has and the costs the firm incurs to get that revenue.
Background image of page 4
4/18/11 Start Off Simply Assume after earning the $3 million the company distributes all the profits to shareholders and then closes down. Also assume there is just 1 share of stock available. This means whoever owns the single share gets all the money.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4/18/11 How much would you pay for the share? If the price for the share was < $3 million buy Why? Because you would make money If the price for the share was > $3 million you would pass up the chance Why? Since you would make a loss. In an open and efficient market we would expect the share to be worth exactly $3 million.
Background image of page 6
4/18/11 Discussion Question Insider trading is when a business person buys or sells stock based on knowledge that only they have. Information not known publicly. Is insider trading wrong? If wrong, should punishment be harsh or
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4/18/11 Simple Share Price Model Share Price = Revenue - Costs. With the equation we begin to see the ways the macro-economy impacts share prices. Revenue and costs are a function of Internal decisions and
Background image of page 8
4/18/11 Internal and External Internal decisions are very important. Should the company come out with a new model? Should the company advertise? Should the company hire more workers? External factors are also very important. Revenue is impacted by overall state of
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4/18/11 Relax Assumptions #1 In real life companies do not issue a single share of stock. Instead, companies issue many thousands and even millions of shares. Let’s relax the assumption of just one share and now assume there are 100 shares.
Background image of page 10
4/18/11 Relax Assumptions #1 If each share is identical to all other shares, then each share gets 1/100th or 1% of the profits. In our example, the $3 million profit would be divided into 100 pieces, and each share gets $30,000 Share Price = Profits Number of Shares
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4/18/11 Relax Assumptions #2 Company Exists for More Assume the company exists for two years and each year earns $3 million. Clearly people are willing to bid more
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/17/2011 for the course EC 102 taught by Professor Zagorsky during the Spring '08 term at BU.

Page1 / 53

6E1_ Stock_Prices - Stock Prices Readings: Zagorsky Chapter...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online