PRESENTED BY :

KULDEEP YADAV

PGDM 2010-12

SEM - 3RD

STOCK MARKET

Share of stock is a private financial asset, like a corporate bond

Both are issued by corporations to raise funds, both offer future payments to their owners

but what is the main difference between these two?

When a firm issues new shares of stock- called public offerings – sale of which generates funds for the firm-newly issued shares can be sold to someone else

Virtually all the shares traded in the stock market are previously issued- trading doesn’t involve the firm that issued the stock

STOCK MARKET AND MACROECONOMY

Contd

• But why the firm still concerned about the price of its previously issued share?

- first, the firm’s owners-its stockholders-want high share prices because that is the price they can sell at

-second, previously issued shares are perfect substitute of new public offerings –

------------therefore, the firm cannot expect to receive higher price for its new shares than the going price on its old shared

---what is the result then??

Explaining Stock Prices—Step #1: Characterize The Market• Price of a share of stock—like any other— is determined in a

market

• We’ll characterize the market for a company’s shares as perfectly competitive

• View stock market as a collection of individual, perfectly competitive markets for particular corporations’ shares

• Many buyers and sellers

• Virtually free entry

Step #2: Find The Equilibrium

• Like all prices in competitive markets, stock prices are determined by supply and demand• However, in stock markets, supply and demand curves require careful interpretations

• Figure 1 presents a supply and demand diagram for shares of Fedex Corporation

• On any given day, number of Fedex shares in existence is just the number that the firm has issued previously• Just because 302 million shares of Fedex stock exist, that does not mean that this is the

number of shares that people will want to hold

• People have different expectations about firm’s future profits

• At any price other than $90 per share, number of shares people are holding (on the supply curve) will differ from number they want to hold (on the demand curve)

• Only at equilibrium price of $90— people satisfied holding number of shares they are actually holding

• Stocks achieve their equilibrium prices almost instantly

Figure 1: The Market For Shares of Fedex Corporation

Number of Shares

Price per Share

E

S

$120

90

60

D

302 million

Step #3: What Happens When Things Change?

• Supply curve for a corporation’s shares shifts rightward whenever there is a public offering• The changes we observe in a stock’s price—over a few minutes, a few days, or a few

years—are virtually always caused by shifts in demand curve

• what causes these sudden changes in demand for a share of stock?

• In almost all cases, it is one or more of the following three factors• Changes in expected future profits of firm

• Any new information that increases expectations of firms’ future profits will shift demand curves of affected stocks rightward • Including announcements of new scientific discoveries, business developments, or changes in

government policy

• Macroeconomic Fluctuations

• Any news that suggests economy will enter an expansion, or that an expansion will continue, will shift demand curves for most stocks rightward

• Changes in the interest rate

• A rise (drop) in the interest rate in the economy will shift the demand curves for most stocks to the left (right)

Step #3: What Happens When Things Change?• Even expectations of a future interest rate change can shift demand

curves for stocks• Such an event occurred on February 27, 2002, when Fed Chair

Greenspan announced that it appeared economy was recovering from its recession• News that causes people to anticipate a rise in interest rate will shift

demand curves for stocks leftward• Similarly, news that suggests a future drop in the interest rate will shift demand

curves for stocks rightward

Figure 2a: Shifts in the Demand for Shares Curve

Number of Shares

Price per Share

S

$75

60

D2

D1

(a)

298 million

The demand curve shifts rightward when new information causes expectations of:• higher future profits• economic expansion• lower interest rates

Figure 2b: Shifts in the Demand for Shares Curve

45

D3

Number of Shares

Price per Share

S

60

D1

298 million

(b)

The demand curve shifts leftward when new information causes expectations of:• lower future profits• recession• higher interest rates

Figure 3: The Effect of Higher Stock Prices on the Economy

(a) (b)

Y1 Y2Real GDP

Ag

gre

gate

Exp

en

dit

ure

AEhigher stock prices

Real GDP

Price

Level

Y1 Y3 Y2

AS

45°

AElower stock prices

ADhigher stock prices

ADlower stock prices

P1

P2

How the Economy Affects the Stock Market

• Let’s look at the other side of the two-way relationship• How economy affects stock prices

• Many different types of changes in the overall economy can affect the stock market

• Let’s start by looking at the typical expansion• Real GDP rises rapidly over several years

• In typical expansion (recession), higher (lower) profits and stockholder optimism (pessimism) cause stock prices to rise (fall)

WHAT IS THE REASON FALLING DOWN STOCK MARKET ?

• The ghost of 2008 seems to have returned to haunt Indian investors with the stock market showing no signs of bouncing back.

• With adverse signals coming from within the country (high interest rates and slow down in economic activity) and the global markets (Europe and US debt crisis), the BSE Sensex fell 2 per cent to 16,141.67. Intra-day, it dipped below the 16K mark, but bounced back at close, mainly on account of short covering

CONT….He recent decline of US stocks proved to be the cause

of panic not only in the United States but all over the world. For some reason or another, many countries are still dependent on the many economic benefits brought by the most powerful country in the world, and last week’s negative plunge has resulted into a worldwide confusion.

In this line of economic disadvantage, some compares the current downfall to the 2008 meltdown which was also felt all over the globe. As fear heightens since little or no recovery and influx is seen, selling of common US stocks may be seen as a premature decision and is a result of panic and unwanted alarm.

CONT….

Fiscal development also saw their inconvenience with a meager 1% rise in gross domestic products during the first half of this year. To make matters worse than they already are, S&P relegated US credit ratings, pointing to insufficient progress and long term budget problems in Washington.

Will the continuous rapid fall of the economy spark another recession? As many of us know, unemployment is still a major factor in the US and current economic troubles will most likely to be another core reason.

Even without the eventual promise of immediate financial recovery, investors are still advised to remain on trail; of course, no one gets rich overnight and the potential of the country to get back on its track is a big possibility.

LAST WEEK STOCK MARKET

• SENSEX 16730.94

• NIFTY 5035.8

SECTOR (NSE )

• BANK NIFTY 10056.40

• INFRASTUCTURE 2777.15

• CNX IT 5469.65

• CNX REALTY INDEX 228.65

• CNX 100 4969.65

SECTOR (BSE )

• FMCG 3918.42

• HEALTHCARE 5994.16

• BSE POWER 2262.84

• BSE 500 6558.92

• BSE IT 5049.94

• 15,848.83

• 4,747.80

• 8,974.55

• 2,668.75

• 5,088.70

• 213.05

• 4,681.40

• 3,892.69

• 5,819.60

• 2,158.33

• 6,192.03

• 4,719.97

WEEK OPENING WEEK CLOSING

CONT…

US investment banking firm invokes contract clause enabling it to cut the pay of London-based investment bankers

CONT…..• Except BSE-Realty, all the other 12 sectoral indices, including BSE

Capital Goods, BSE Power and BSE Oil & Gas, ended in the red.

• The BSE Sensex, BSE Mid-cap and the BSE-500 indices have fallen about 13 per cent in the last one month while the BSE Small-cap has slumped 17 per cent.