Chapter 7 Flashcards
the primary way in which corporations raise equity capital.
Common stock
those who hold stock in a corporation.
Owns an interest in the corporation equal to the percentage of outstanding shares they own.
Holds voting rights.
Is a residual claimant- the stockholder receives whatever remains after all other claims against the firms assets have been satisfied.
May receive dividends.
Stockholders
the distribution of earnings to stockholders
Dividends
The stock market is an interaction between buyers (demand) and sellers (supply) which determines the equilibrium price for a stock.
The price is set by the buyer who values the stock the most and is willing to pay the highest price.
Superior information about an asset can increase its value by reducing its perceived risk.
As new information is released about a company, investors revise their estimates of the value of the stock and may be motivated to buy or sell it, so stock prices are constantly changing.
How the Market Sets Stock Prices
John Muth developed the theory of rational expectations- individuals base their decisions on human rationality, information available to them, and their past experiences.
When people forecast a particular price over and over again, they tend to adjust their forecasting rules to eliminate avoidable errors. Thus there is continual feedback form past outcomes to current expectations.
Another way of saying this is: Individuals make decisions based on the best available information in the market and learn from past trends.
As a result, forecasts will be wrong sometimes, but on average, forecasts will be correct.
This theory is based on the economic assumption that people behave in ways that maximize their utility (their enjoyment of life) or profits.
Rational Expectations
