MODULE 2
FINANCIAL MARKETS
AND
INSTITUTIONS
Lesson 3
The Stock
Market
Learning Outcomes:
• Explain how stock market operates and list the
distinction between the different types of stock
markets
• Learn about the importanceof market efficiency
• Explain why some markets are more efficient than
others.
STOCK market
• is where the prices of firms’ stocks are
established.
• It is the most active secondary market and the
most important one to financial managers.
There are a number of different stock markets.
• The two leaders are the New York Stock
Exchange (NYSE) and the Nasdaq stock market.
Two basic types of trading stocks:
Physical Location Exchanges Electronic Dealer-based Markets
• are tangible entities. Formal organizations • is a large collection of brokers and dealers,
having tangible physical locations that connected electronically by telephones and
conduct auction markets in designated computers, that provides for trading in unlisted
(“listed”) securities. Example of this type is securities.
the NYSE and the American Stock • To name a few example, we have Nasdaq, Over-
Exchange. the-Counter Market or OTC and Electronic
Communications Networks or ECNs.
Common Stock has two markets:
Closely Held Corporation
• is corporation that is owned by a few
individuals who are typically associated
with the firm’s management. This is
common for companies that are so small
that their common stocks are not actively
traded; they are owned by relatively few
people, usually the companies’ managers.
Publicly Owned Corporation
• is a corporation that is owned by a relatively
large number of individuals who are not
actively involved in the firm’s management.
This is for large companies whose stocks are
owned by thousands of investors, most of
whom are not active in management.
3 types of Stock Market Transactions:
2. primary market is
1. Secondary market where when additional shares
outstanding shares of sold by established
established publicly owned publicly owned
companies are traded. The companies.
market for outstanding shares,
or used shares. The company
receives no new money when
sales occur in this market.
There are three types of Stock Market Transactions:
3. The Initial Public Offering
(IPO) market is the market for
stocks of companies that are in the
process of going public.
Going Public is the act of selling
stock to the public at large by a
closely held corporation or its
principal stockholders
Intrinsic value is the price at which the stock
Market price is the
would sell if all investors had all knowable
current price of a stock
information about a stock. It is based on its expected
future cash flows and its risk
The market price tends to fluctuate around the intrinsic value; and the intrinsic value changes
over time as the company succeeds or fails with new projects, competitors enter or exit the
market, and so forth.
Equilibrium price is the price
that balances buy and sell orders at
any given time.
• When a stock is in equilibrium,
the price remains relatively
stable until new information
becomes available and causes
the price to change.
Efficient market is a market in which prices are
close to intrinsic values and stocks seem to be in
equilibrium.
• When markets are efficient, investors can buy
and sell stocks and be confident that they are
getting good prices. When markets are
inefficient, investors may be afraid to invest and
may put their money “under the pillow,” which
will lead to a poor allocation of capital and
economic stagnation. So from an economic
standpoint market efficiency is good.
• Even if markets are efficient and all stocks and
companies are fairly priced, an investor should
still be careful when selecting stocks for his or
her portfolio.
THANK
YOU
