EC223 chapter14 - 1 Chapter 14 Learning Objectives Basics...

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Chapter 14: Learning Objectives Basics of Stock Markets Explaining Stock Price Behaviour: Efficient Markets & Fundamentalists Stock Market Volatility The Home-bias in Stock Purchases International Stock Price Linkages 2
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Some Institutional Background Stocks are traded in markets OTC (over the counter) Brokers’ informed over the phone, over the fax or over the internet markets.  Exchanges (TSX) In Canada, the TSX Venture Exchange quotes more than 1000 OTC stocks.   In the USA, NASDAQ (National Association of Securities Dealers Automated  Quotations) There is also Nasdaq Canada. The Ontario Securities Commission regulates over the counter market in Ontario. Trading in the TSX is driven by electronic quotations of bid-ask spreads.  Trading is carried out through dealers who hold an inventory of stocks.  Many stocks are traded on stock exchanges, which are organized markets.  In such markets, investors exchange shares with one another again either  electronically through a broker or as in New York, where bids and offers (asking  prices) are shout by members of the exchange acting as agents for investors.   3
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Some Institutional Background Canada had 4 stock exchanges: 1. The Montreal Stock Exchange 2. The Toronto Stock Exchange, TSE 3. The Alberta Stock Exchange 4. The Vancouver Stock Exchange In 1999, TSE became the sole market for senior stocks, that is for  stocks traded on current exchanges Junior stock issues were consolidated with the merger of Alberta and  Vancouver stock exchanges into what became the TSX.  In April 2000, the TSE, now renamed the TSX, became a for profit  institution.  The trading floor was closed on April 1997, since then all trading has  been done electronically. Due to modern technology, Canadian investors can easily use  brokers who have seats on exchanges in London, Tokyo and Paris.    4
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Some Institutional Background Stock performance is measured via stock price indexes TSX composite (based on the market value of the shares being  traded) DJIA, Dow Jones Industrial Average S&P 500 Stock indexes are frequently adjusted to reflect  changes in trading patterns, preferences for  certain stocks, and their relative importance in  the stock market. DJIA was revised 3 times in 1990s.   5
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Stock price determination Two approaches to understand price  determination in the stock market: 1.
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