Adopted from “Financial Markets and Institutions” – Mishkin & Eakins (9E)

For TCHE401/TCH401E Classes in FTU only, no further distribution/reproduction allowed.

In August of 2004, Google went public, auctioning its shares in an
unusual IPO format. The shares originally sold for $85/share, and
closed at over $100 on the first day. At the end of 2012, shares are
trading on Nasdaq at over $707 / share.
Topics Addressed
Stock Market Indexes
Buying Foreign Stocks
Regulation of the Stock Market
Investing in Stocks
Computing the Price of Common Stock
How the Market Sets Security Prices
Errors in Valuation
1. Represents ownership in a firm
2. Earn a return in two ways 2 cach de earning return cua stock holder

Price of the stock rises over time Vs tu cach la 1 stock investor -> aim price rises or dividends
Dividends are paid to the stockholder
3. Stockholders have claim on all assets -> Stockholders have claim on all remaining/ residual
assets
4. Right to vote for directors and on certain issues vi dc bo phieu, but han che neu minh
5. Two types
la co dong nho

Common stock
▪Right to vote
▪Receive dividends
Preferred stock
▪Receive a fixed dividend
▪Do not usually vote
Organized exchanges
NYSE is best known, with daily volume around 4 billion shares, with
peaks at 10 billion.
“Organized” used to imply a specific trading location. But computer
systems (ECNs) have replaced this idea.
Others include the ASE (US), and Nikkei, LSE, DAX (international)
Listing requirements exclude small firms
Over-the-counter markets
Best example is NASDAQ (Now it is considered as an exchange)
Dealers stand ready to make a market
Today, about 3,000 different securities are listed on NASDAQ.
Important market for thinly-traded securities—securities that don’t
trade very often. Without a dealer ready to make a market, the equity
would be difficult to trade.
Organized exchanges (e.g., NYSE)
Auction markets with floor specialists (DMMs)
25% of trades are filled directly by specialist
Remaining trades are filled through SuperDOT
Over-the-counter markets (e.g., NASDAQ)
Multiple market makers set bid and ask prices
Multiple dealers for any given security
ATSs and MTFs allow buyers and sellers to dead directly with each other.
ATS - Alternative Trading System:
An ATS, or Alternative Trading System, is a platform or marketplace that allows for the
trading of financial securities outside of traditional stock exchanges.
ATSs are also commonly referred to as "dark pools" when they prioritize anonymity in
trading.
ATSs facilitate trading in various financial instruments, including stocks, bonds, and
other securities.
They are used by institutional investors, such as asset managers, hedge funds, and
broker-dealers, to execute large block trades or trades with minimal market impact.
They often provide opportunities for trading with reduced market impact and price
slippage.
MTF - Multilateral Trading Facility:
An MTF, or Multilateral Trading Facility, is a type of European trading venue.
They are typically electronic trading platforms that bring together multiple buyers and
sellers to execute trades in various financial instruments, including equities, bonds, and
derivatives.
MTFs aim to increase competition, reduce trading costs, and provide investors with
alternatives to traditional exchanges.
ECNs (electronic communication networks) are a subset of
ATSs/MTFs that allow brokers and traders to trade without the
need of the middleman.
They provide:
Transparency: everyone can see unfilled orders
Cost reduction: smaller spreads
Faster execution
After-hours trading
However, ECNs are not without their drawbacks:
Don’t work as well with thinly-traded stocks
Many ECNs competing for volume, which can be confusing
Major exchanges are fighting ECNs, with an uncertain outcome
Exchange Traded Funds are a recent innovation to help keep
transaction costs down while offering diversification.
Represent a basket of securities
Traded on a major exchange
Index to a specific portfolio (e.g., the S&P 500), so management fees are low
(although commissions still apply)
Exact content of basket is known, so valuation is certain
Generally speaking, prices are set in competitive markets as the
price set by the buyer willing to pay the most for an item.
The buyer willing to pay the most for an asset is usually the buyer
who can make the best use of the asset.
Superior information can play an important role.
Consider the following three valuations for a stock with certain
dividends but different perceived risk:

Investor Discount Rate Stock Price

You 15% $16.67
Jennifer 12% $22.22
Bud 7% $50.00

Bud, who perceives the lowest risk, is willing to pay the most and
will determine the “market” price.
Although the pricing models are useful, market participants
frequently encounter problems in using them. Any of these can
have a significant impact on price in the Gordon model.
•Problems with Estimating Growth
•Problems with Estimating Risk
•Problems with Forecasting Dividends
Security valuation is not an exact science!
Considering different growth rates, required rates, ..., is important
in determining if a stock is a good value as an investment.
Growth (%) Price ($)
1 14.43
3 17.17
5 21.00
10 44.00
11 55.50
12 74.67
13 113.00
14 228.00
Required Return (%) Price ($)
10 42.00
11 35.00
12 30.00
13 26.25
14 23.33
15 21.00
The financial crisis, which started in August 2007, was the start of
one of the worst bear markets.
The crisis lowered “g” in the Gordon Growth model - driving down prices.
Also impacts ke, again lowering prices.
The expectations were still optimistic at the start of the crisis. But, as the
reality of the severity of the crisis was understood, prices plummeted.
Both 9/11 and the Enron scandal were events in 2001.
Both should lower “g” in the Gordon Growth model - driving down prices.
Also impacts ke, again lowering prices.
We did observe in both cases that prices in the market fell. And subsequently
rebounded as confidence in US markets returned.
Stock market indexes are frequently used to monitor the behavior
of a groups of stocks.
Major indexes include the Dow Jones Industrial Average, the S&P
500, and the NASDAQ composite.
The securities that make up the (current) DJIA are included on the
next several slides.
Company Stock Symbol
3M Co. MMM
Apple Inc. AAPL
American Express Co. AXP
Boeing Co. BA
Caterpillar Inc. CAT
Chevron CVX
Cisco Systems CSCO
Coca-Cola Co. KO
E.I. DuPont de Nemours DD
Exxon Mobil Corp. XOM
Company Stock Symbol
General Electric Co. GE
Goldman Sachs GS
Home Depot Inc. HD
International Business IBM
Machines
Intel Corp. INTC
Johnson & Johnson JNJ
JP Morgan Chase & Co. JPM
McDonald’s Corp. MCD
Merck & Co. Inc. MRK
Microsoft Corp. MSFT
Company Stock Symbol
Nike NKE
Pfizer Inc. PFE
Procter & Gamble Co. PG
Travelers Corp. TRV
United Technologies Corp. UTX
United Health Group UNH
Verizon Communications VZ
Inc.
Visa International V
Wal-Mart Stores Inc. WMT
Walt Disney Co. DIS
1-24
1-25
Buying foreign stocks is useful from a diversification perspective.
However, the purchase may be complicated if the shares are not
traded in the U.S.
American depository receipts (ADRs) allow foreign firms to trade
on U.S. exchanges, facilitating their purchase. U.S. banks buy
foreign shares and issue receipts against the shares in U.S.
markets.