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1、Chapter8Stocks,StockMarkets,and Market EfficiencyLearningObjectivesUnderstand . . .LO1ThecharacteristicsofcommonstockLO2MeasuresofthelevelofthestockmarketLO3ThevaluationofstocksLO4InvestinginstocksforthelongrunLO5Thestockmarket’sroleintheeconomyStocksplayaprominentroleinourfinancialand
2、economiclives.Forindividuals,theyprovideakeyinstrumentforholdingpersonalwealthaswellasawaytodiversify,spreadingandreducingtherisksthatweface.Importantly,diversifiablerisksarerisksthataremorelikelytobetaken.Bygivingindividualsawaytotransferrisk,stocks1supplyatypeofinsuranceenhancingoura
3、bilitytotakerisk.Forcompanies,theyareoneofseveralwaystoobtainfinancing.Beyondthat,though,stocksandstockmarketsareacentrallinkbetweenthefinancialworldandtherealeconomy.Stockpricesarefundamentaltothefunctioningofamarket-basedeconomy.Theytellusthevalueofthecompaniesthatissuedthestocksand,
4、likeallotherprices,theyallocatescarceinvestmentresources.Thefirmsdeemedmostvaluableinthemar-ketplaceforstocksaretheonesthatwillbeabletoobtainfinancingforgrowth.Whenresourcesflowtotheirmostvalueduses,theeconomyoperatesmoreefficiently.Mentionofthestockmarketprovokesanemotionalreactioninm
5、anypeople.Theyseeitasaplacewherefortunesareeasilymadeorlost,andtheyrecoilatitsunfathomableboomsandbusts.DuringoneinfamousweekinOctober1929,theNewYorkStockExchangelostmorethan25percentofitsvalue—aneventthatmarkedthebeginningoftheGreatDepression.InOctober1987,pricesfellnearly30 percentin
6、oneweek,includingarecorddeclineof20percentinasingleday.Crashesofthismagnitudehavebecomepartofthestockmarket’sfolklore,creatingthepopularim-pressionthatstocksareveryrisky.Inthe1990s,stockpricesincreasednearlyfivefoldandAmericansforgotaboutthe“blackOctobers.”Bytheendofthedecade,manypeopl
7、ehadcometoseestocksas1ThispointwascentraltoourdiscussionsofriskinChapter5.Ourabilitytodiversifyriskeitherthroughtheexplicitpurchaseofinsuranceorthroughinvestmentstrategiesmeansthatweareabletodoriskythingsthatweotherwisewouldnotdo.cec2174X_ch08_189-213.indd18925/11/135:39PM190lChapter
