The market for corporate stock is the most widely followed of all securities markets, with millions of shares changing hands each day. In this chapter, the following points were made:

• Most stock trades involve not the creation of new funds—the raising of new capital—but rather the exchange of existing shares for money. Thus, most stock trading takes place in the secondary market, not the primary (or new issue) market.



• Trading in equity shares reveals a close correlation with economic conditions. Advancing stock prices appear to be a leading indicator, forecasting the growth of the economy, in part because business investment spending appears to be influenced by what is happening or is expected to happen to stock prices.



• Corporate stock can be divided into two major types: common stock and preferred stock. Common stock represents a residual claim against the assets of the issuing firm, entitling the owner to share in the earnings of the firm when it is profitable and to share in the market value of the company’s assets if it is liquidated. Preferred stock carries a stated annual dividend expressed as a percent of the stock’s par value.



• Households—individuals and families—are the dominant holders of corporate stock, followed by pension funds, mutual funds, and insurance companies.



• Stock prices are positively related to the expected stream of dividends paid by the firm that issued the stock and negatively related to the discount rate associated with that expected stream of dividends (measuring equity risk).



• The market for corporate equity shares normally is divided into two main parts—the organized exchanges and the over-the-counter market. Trading on the exchanges is governed by regulations and formal procedures to promote competition and to contribute toward improved liquidity of equity shares. The over-the-counter (OTC) market is less formal than the organized exchanges and generally involves broker-to-broker or dealer-to-dealer transactions on behalf of stock buyers and sellers.



• Other branches of the stock market have become important in recent years. These include a third market, in which exchange-listed stocks are traded over the counter; and a private equity market, where new businesses, privately held companies and partnerships, troubled firms, and even larger publicly traded companies can find financing for their long-term equity needs. The private equity market is involved in selling shares off the major exchanges, with trading taking place between stock issuers and limited partnerships, venture capital companies, and other specialized investors.



• The stock market has become global in scope, rising from a series of national markets due to advances in the technology of information and funds transfer.



• Competition for information among professional investors causes stock markets to be efficient—quickly incorporating new, publicly available information into the prices of stocks.



• Because new information arrives randomly, an informationally efficient stock market is characterized by stock prices that closely follow a random walk. Changes in stock prices appear to be essentially random and unforecastable.



• Some professional investors employ technical analysis when selecting stocks for their portfolios by charting patterns in the data; others rely on fundamental analysis, which calls for a detailed examination of a corporation’s financial statements and other factors that could affect industry groups and the economy as a whole.