Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
ECONOMICS 179 ECONOMICS OF THE STOCK MARKET Professor Thornton T, Th, 11:00-12:15 Winter 2001 Pray-Harrold 407 Office and Phone: Pray-Harrold 707-F, 487-0080 Office Hours: T, Th, 12:15 – 4:15, and by appointment. Texts: John M. Dalton, How the Stock Market Works, Second Edition, 1993. Burton G. Malkiel, A Random Walk Down Wall Street, Fourth Edition, 1999. One of the most visible and important markets in the U.S. economy is the stock market. The stock market plays a pivotal role in the social organization of economic activity, and the outcomes of interactions that take place in this market have important consequences for the wealth and prosperity of individuals, firms, and the nation as a whole. Recent developments in the commercial internet and information technology have made the stock market increasingly accessible to anyone who wants to participate. Financial data and news is now readily available to the general public as well as Wall Street professionals, and many individuals are taking an active role in managing their own stock portfolios and retirement accounts. In this changing environment, it is important for ordinary individuals to have a basic knowledge of the stock market and the skills necessary to assimilate financial information and make educated investment decisions. The objective of this course is to provide you with a fundamental understanding of how the stock market works, how investment decisions are made, and recent changes that are transforming the stock market and making it accessible to the general public. You will also learn how to use the internet to access information about the stock market. Your grade in the class will be based on two exams, a midterm and a final, several homework/internet assignments, and participation in a simulated stock market game. The weights are as follows. Exams: 50% Homeworks: 40% Stock Market Game: 10% There are currently more that 8,000 Web sites that provide a vast array of information on the stock market and investing. The homework/internet assignments are designed to help you become acquainted with accessing and interpreting this information. During the semester, you will also play a simulated stock market game. This game will be played on the VirtualStockExchange Web site, which was founded by alumni from Stanford and Cornell University as an educational tool to teach students about investing in the stock market. It is a simulated online brokerage firm that lets you do mock trading of all securities listed on the major stock exchanges in the U.S. Thus, you will be buying and selling stocks on the internet just like you would if you had an account at an online broker. The only requirement is that you play the game, and submit periodic updates of your portfolio holdings. 1 The following books are recommended for students who wish to do additional reading on topics related to the stock market. These books are not required for this class. Jeremy Siegel, Stocks for the Long-Run, Second Edition, McGraw-Hill, 1998. Robert Shiller, Irrational Exuberance, Princeton University Press, 2000. Richard Tewles and Edward Bradley, The Stock Market, Seventh Edition, John Wiley and Sons, 1998. Thomas Bass, The Predictors, Henry Holt and Company, 1999. John Bogle, John Bogel on Investing: The First 50 Years, McGraw-Hill, 2001. Peter Lynch, One Up on Wall Street, Simon and Schuster, 2000. Investors Business Daily, Guide to the Stock Market, John Wiley and Sons, 1996. Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management, 2000. Jonathan Burton, Investment Titans: Investment Insights from the Minds That Move Wall Street, McGraw Hill, 2001. Nicholas Teebagy, The Math Behind Wall Street, Four Walls Eight Windows, 2000. Robert W. Kolb, Financial Derivatives, New York Institute of Finance, 1993. OUTLINE OF TOPICS AND ASSIGNMENTS 1. Economics and Markets What is economics? How do economists view the economy? What is a market? Why do economists study markets and complex exchange processes? How do economists organize their thinking about markets? Why study the stock market? Dates: Tuesday 1/9. Assignment: None. 2. Firms, Corporations, Stocks and Bonds What is the objective of a firm? How are firms legally organized? What is a corporation? What do corporations do with the profits that they make? What is the difference between common stock and preferred stock? What are preemptive rights, stock warrants, and stock options? Why are these financial instruments called derivatives? Dates: Thursday 1/11, Tuesday, 1/16. Assignment: Dalton, chapter 1, chapter 9. 3. Investment Returns, Stock Reports, and Stock Indexes What is the difference between total return and rate of return on an investment? Do stocks or bonds have higher historical returns? How do you read a stock report? What is 2 a stock index? What is the difference between the Dow Jones Industrial Average, Standard and Poor’s 500 Index, Wilshire 5000 Index, and the Russell Indexes? Dates: Thursday 1/18, Tuesday 1/23. Assignment: Dalton, chapter 2. 4. Primary Market for Stocks and Initial Public Offerings What is the primary market for stocks? Who are the major players in this market? What role do investors, corporations, brokers, and dealers play in this market? What is the difference between a private placement of stock and a public offering of stock? How does an initial public offering (IPO) of stock work? Can investors become wealthy by buying stock issued by corporations in an initial public offering? Dates: Thursday 1/25, Tuesday 1/30. Assignment: Dalton, chapter 3. 5. Secondary Market for Stocks: How Stocks Are Bought and Sold What is the secondary market for stocks? Who are the major players in this market? What role do investors, brokers and dealers play in this market? What is the difference between an organized exchange and an over-the-counter market? What are the major types of brokerage firms? What is the difference between cash and margin brokerage accounts? How does a cash stock transaction differ from a margin stock transaction? What does it mean to sell a stock short? What is the difference between market, limit, and stop orders? How are stocks traded on the New York Stock Exchange? What role do specialists play on the exchange? How are stocks traded on the over-the-counter market? Will Electronic Communications Networks eventually replace organized exchanges and the existing over-the-counter market? Dates: Thursday 2/1, Tuesday 2/6, Thursday 2/8, Tuesday 2/13. Assignment: Dalton, chapters 4,5,6,7,10. 6. What Determines Stock Prices: Fundamentals or Psychology? What is the firm foundation theory of stock valuation? How does a rational investor determine the price she is willing to pay for a stock? What factors determine the intrinsic value of a share of stock? What are undervalued and overvalued stocks? What is the market psychology theory of stock valuation? How does an emotional investor determine the price she is willing to pay for a stock? What determines the psychic value of a stock? What is a speculative bubble? What is the price/earnings ratio, and how does it measure the value of a stock? Does the stock market have rational underpinnings, or is it just a big casino? Dates: Thursday 2/15, Tuesday 2/20, Thursday 2/22, Tuesday 2/27. Assignment: Malkiel, chapters 1,2,3,4; 3 Midterm Exam: Thursday 3/1 Winter Vacation: 3/6, 3/8 7. Stock Market Analysis and Investment Strategies: Are Stock Prices Predicable? What is fundamental analysis? What is technical analysis? Can investors and stock market analysts make big profits using these investment strategies? What is the random walk theory and the efficient market hypothesis? Do they suggest that investing in the stock market is a pure gamble? Dates: Tuesday 2/13, Thursday 2/15. Assignment: Malkiel, chapters 5,6,10 (pages 240 – 258); Dalton, chapter 11. 8. Mutual Funds: Can Professional Portfolio Managers Beat the Market? What is a mutual fund? What different types of mutual funds exist? How are mutual fund shares priced? What is a load, expense ratio, 12b-1 fee, and turnover ratio? How do you judge the performance of a mutual fund? How does an index fund differ from an actively managed fund? Can mutual fund portfolio managers consistently beat the market? Dates: Tuesday 3/20, Thursday 3/22. Assignment: Dalton, chapter 8; Malkiel, chapter 7, 10 (pages 259 – 270), 14. 9. Stock Market Reaction to News What impact does economic, political, and other news have on the stock market? Why is expected news not news? Does the market react to news in a predictable fashion? Why do stock market participants hate uncertainty? To what extent does new affect stock prices? Dates: Tuesday 3/27. 10. Stock Market Performance: 1982 – Present What factors have caused the dramatic increase in the stock market since 1982? What role have fundamental factors played in the rising stock market? What role have psychological factors played in the rising stock market? Is the stock market fairly valued, overvalued, or undervalued? Why did the stock market “crash” in 1987? How might the stock market perform in the near future? Dates: Thursday 3/29, Tuesday 4/3, Thursday 4/5, Tuesday 4/10. Assignments: Dalton, chapter 14. 4 11. Principles of Modern Portfolio Theory: How to Construct a Portfolio of Stocks What is modern portfolio theory? How is risk defined and measured? How can investors reduce risk? How can modern portfolio theory be used as a guide to choosing a stock portfolio? Dates: Thursday 4/12, Tuesday 4/17, Thursday 4/19. Assignments: Malkeil, chapters 8,9. Final Exam: Thursday, April 26, 11:00 – 12:30 5