in the last chapter we identified the capital markets as where long term securities 638279

In the last chapter we identified the capital markets as where long term securities trade. We then examined the bond market and discussed how bond prices are established. In this chapter we continue our investigation of the capital markets by taking a close look at the stock market. The market for stocks is undoubtedly the financial market that receives the most attention and scrutiny. Great fortunes are made and lost as investors attempt to anticipate the market”s ups and downs. We have witnessed an unprecedented period of volatility over the last decade. Stock indexes hit record highs in the late 1990s, largely led by technology companies, and then fell precipitously in 2000. By 2007 they had returned to record highs before falling back to 1997 levels in 2009. In this chapter we look at how this important market works. We begin by discussing the markets where stocks trade. We will then examine the fundamental theories that underlie the valuation of stocks. These theories are critical to an understanding of the forces that cause the value of stocks to rise and fall minute by minute and day by day. We will learn that determining a value for a common stock is very difficult and that it is this difficulty that leads to so much volatility in the stock markets.