Risk Cash flows do not match EXPECTATION.

1. Risk Cash flows do not match EXPECTATION. • Is a company with roller-coaster like sales figure a risky company? • Why are Pharmaceutical companies so big? • What kind of company is GE like? Why? • Why do most people can't sleep tight after loosing money in the casino/stock while some can?

2. Independent or Correlated Risks         - stand-alone risk (project risk)      - firm risk      - diversified portfolio risk     - market risk

3. Special Topic II Stock

4. #1 Goal of Firm: MAXIMIZE SHAREHOLDER WEALTH • Some questions: • Is this true in every economy?Why CEOs invest in money loosing projecting? • Why do companies almost always defend against hostile takeover?

5. The Anatomy of Stocks • Firms issue shares of stock when they need to raise long-term financial capital • usually for investment spending • A share of stock represents equity in a corporation and entitles the owner to a share of the corporation’s profits • Stock may be preferred stock or common stock

6. Preferred Stock • Owners of preferred stock receive a fixed dividend to which they are entitled before owners of common stock receive anything • similar to the interest payment that a bondholder receives • dividends must only be paid to preferred stockholders if the firm earns a profit (unlike interest which must always be paid) • dividend payments are not tax-deductible (unlike interest payments)

7. Common Stock • Common stockholders receive a variable dividend after the preferred stockholders have been paid and retained earnings have been set aside • retained earnings are profits not distributed to stockholders and are usually used to fund investment projects

8. The Anatomy of Stocks • All companies that issue publicly traded shares of stock are regulated by the Securities and Exchange Commission (SEC) • the SEC has broad disclosure requirements to protect investors • the financial condition of the corporation • information about key personnel • any changes that would be important to stockholders

9. The Stock Markets • When most people think about the stock market, they think about Wall Street • Virtual vs. Physical

10. The Stock Markets • The expanded use of computers to execute trades has accommodated the greater volume of trading and has facilitated an increase in program trading by institutional investors • allows institutional investors to pre-program computers to buy or sell a large basket of stocks

11. The New York Stock Exchange • The New York Stock Exchange (NYSE) is the world’s largest market for trading securities • about 2,800 companies including more than 470 non-U.S. companies • For a stock to be listed, the corporation must apply to the exchange and meet several criteria dealing with the size and number of shareholders

12. The New York Stock Exchange • The NYSE is a highly-visible auction-type market where members (acting as agents for others) buy and sell shares of stock • each member has purchased a seat on the exchange • the price of a seat is determined by supply and demand • the benefits of membership include direct participation in stock trading and charging commissions to customers for trading stocks

13. The New York Stock Exchange • Each firm whose stock is listed is assigned to a single post where a specialist in that stock manages the auction process • members of the NYSE bring all large buy and sell orders to the floor • orders are then funneled to the appropriate post • the forces of supply and demand determine stock prices

14. The New York Stock Exchange • When a new price is reached, a clerk records the information and sends it out over the ticker • provides a constant stream of stock symbols and prices • each symbol consist of 3 or fewer letters and represents the stock of a particular corporation

15. Other Exchanges • The American Stock Exchange • over 660 corporations • Regional exchanges that primarily trade stocks listed on the NYSE are located in Boston, Chicago, San Francisco, and Philadelphia • Many foreign countries also have stock exchanges

16. The Over-the-Counter Market • The over-the-counter market is composed of thousands of securities dealers located all over the country • transactions are executed over the telephone or via computer • dealers buy and sell securities at publicly quoted prices • market is regulated by the National Association of Securities Dealers (NASD)

17. The Over-the-Counter Market • About 3,000 of the companies whose stocks are traded over the counter are also members of the National Association of Securities Dealers Automated Quotation System (NASDAQ) • the world’s first electronic stock market • stocks are traded on an advanced computer system that provides immediate information about prices and the number of shares traded

18. Stock Market Indexes • The Dow Jones Industrial Average (the Dow) measures movements in the stock prices of the 30 largest companies in the U.S. • oldest index in use today (introduced in 1896) • an unweighted average of the sum of the daily closing prices (adjusted to take account of the effects of stock splits and stock dividends)

19. Stock Market Indexes • The Standard & Poor’s 500 (S&P 500) is a weighted index of prices of 500 broad-based corporations • weighted by their relative values