Econ 215 Chapter 11

Econ 215 Chapter 11 - Chapter 11 The Stock Market Common...

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Unformatted text preview: Chapter 11 The Stock Market Common Stock Share of ownership in a corporation. Entitlement to a share of dividends if distributed. Entitlement to vote for directors and other corporate issues. Preferred Stock Pays a fixed dividend. Price is more stable compared to common stock. Preferred stockholders have a claim on assets after bondholders, but before common stockholders. Market Structures Organized Securities Exchanges Over-the-Counter Trading Electronic Communications Networks Organized Securities Exchanges Trading takes place in a centralized location. A firm must file an application and pay a fee to belong to an organized exchange. Minimal requirements of membership must also be met. Example: NYSE requires earnings of $10 million for last 3 years, $500 million market value, & $100 million in revenues. Cost of a seat is over $1 million. Over-the-Counter Trading An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. OTC trading is characterized by direct trading without a broker. The most common type is from an investment bank to its clients. The primary example of OTC trading is the National Association of Securities Dealers Automated Quotation (NASDAQ). Electronic Communications Networks The first historic example of an ECN was NASDAQ, which automated order processing and provided competitive price quotes online. More advanced ECNs include Instinet (acquired by NASDAQ), Archipelago Exchange (acquired by NYSE), and Bloombergs TradeBook . Valuation of Common Stock A common stock is a long-lived security whose valuation involves the following components: P t = market price per share at date t D t = dividend per share at date t k = required rate of return Valuation Methods The One-Period Valuation Model The Generalized Dividend Valuation Model The Gordon Growth Model The Price Earnings (PE) Valuation method The One-Period Valuation Model If there is no uncertainty, then this model is specified by More generally, the model is specified by which is consistent with EMH....
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Econ 215 Chapter 11 - Chapter 11 The Stock Market Common...

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