Security Markets and Regulations
I. BACKGROUND – SECURITIES MARKETS AND REGULATION
A. The Basics 1. Two types of securities transactions: a. Primary market transactions – issuer sells securities to marketplace b. Secondary market transaction – between two outside investors
2. How we protect consumers: a. Disclosure b. Process rule c. Bans d. Education e. Intermediaries ( profit-driven incentive to ensure quality
3. What is different about common stock?
a. Centrality of capital markets – prices determine allocation of capital, so want accurate price signals ( economic growth
b. Importance of investments relative to other decisions – large fraction of net worth
c. Irrational greed ( risk entire savings
d. Intangible – depends on expertise (info known by insiders) ( informational asymmetry
e. Underlying value based on capital appreciation, dividends, liquidation
f. Collective Action Problem – investors too numerous to band together
4. Efficient Capital Market Hypothesis (ECMH): How the market learns a. Weak-form: all information concerning historical prices is fully reflected in current price b. Semi-strong: stock prices incorporate all publicly available info (i.e. historical info + current public info) ( protected if purchase at current stock price. c. Strong-form: prices incorporate all information, whether publicly available or not.
1 Securities Disclosure
5. Ways to value securities: a. Technical analysis – historical stock price patterns b. Fundamental valuation – PDV = expected payment / discount i. Discount for time value of money I. Reasons for: inflation, uncertainty of return, impatience/hedonism ii. PDV = cash flow / (1 + r)t I. Risks ( CAPM: R = Rf + beta(Rm – Rf)
6. Firm-specific
A. The Basics 1. Two types of securities transactions: a. Primary market transactions – issuer sells securities to marketplace b. Secondary market transaction – between two outside investors
2. How we protect consumers: a. Disclosure b. Process rule c. Bans d. Education e. Intermediaries ( profit-driven incentive to ensure quality
3. What is different about common stock?
a. Centrality of capital markets – prices determine allocation of capital, so want accurate price signals ( economic growth
b. Importance of investments relative to other decisions – large fraction of net worth
c. Irrational greed ( risk entire savings
d. Intangible – depends on expertise (info known by insiders) ( informational asymmetry
e. Underlying value based on capital appreciation, dividends, liquidation
f. Collective Action Problem – investors too numerous to band together
4. Efficient Capital Market Hypothesis (ECMH): How the market learns a. Weak-form: all information concerning historical prices is fully reflected in current price b. Semi-strong: stock prices incorporate all publicly available info (i.e. historical info + current public info) ( protected if purchase at current stock price. c. Strong-form: prices incorporate all information, whether publicly available or not.
1 Securities Disclosure
5. Ways to value securities: a. Technical analysis – historical stock price patterns b. Fundamental valuation – PDV = expected payment / discount i. Discount for time value of money I. Reasons for: inflation, uncertainty of return, impatience/hedonism ii. PDV = cash flow / (1 + r)t I. Risks ( CAPM: R = Rf + beta(Rm – Rf)
6. Firm-specific