ECON 1051 1nd Edition Lecture 23 Outline of Last Lecture I. How Firms Raise Funds (Using External Finance) II. BondsOutline of Current Lecture I. Primary and Secondary MarketsII. Stock and Bond Markets Provide Capital III. Why Do Stock Prices Fluctuate So Much?IV. Disclosure Current LectureI. Primary and Secondary Markets a. Secondary Marketsi. Most of the time when bonds or stocks are traded they are traded on a secondary marketii. Any financial security traded on secondary markets are already pre-issued. 1. Examples a. NYSE (New York Stock Exchange)b. NASDAQ b. Primary Marketsi. Companies actually raise money on primary market. 1. Example a. IPO II. Stock and Bond Markets Provide Capital a. Buyers and sellers of stocks and bonds together make up the stock and bond markets. i. Some trading of stocks and bonds take place in buildings known as exchanges b. Stock i. A financial security that represents partial ownership of a firms c. Dividends i. Payments by a corporation to its shareholdersii. Investors receive capital gain when a firm’s share price rises d. Capital Loss These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. When the price of stock goes down III. Why do Stock Price Fluctuate So Much?a. Stock Market Indexi. The value of the SMI is set equal to 100 in a particular year, called the base year ii. Example1. Dow Jones b. Generally Accepted Accounting Principlesi. Standard accounting methods used because the SEC requires publicly owned firms to report their performance in financial statements, principally income statements and balance sheetsc. Income Statementi. A financial statement that sums up a firm’s revenues, and profit over a period of time. 1. Balance sheet statement: At any given time, what are companies assets and liabilities. 2. Net worth: The difference between what you own and what you owea. High net worth is important to keep companies out of bankruptcyIV. Disclosures a. Firms must disclose financial statements in periodic fillings to the federal government and in annual reports to shareholders b. The Accounting Scandals of the Early 2000si. Firms falsified their statements in order to mislead investors about how profitable the firms actually were1. Enron and WorldCom were two of these
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