Financial Institutions, Markets, and Money, Eleventh Edition

CHAPTER TEN

Equity Markets

EQUITIES (OR STOCKS) REPRESENT ownership of a corporation and are the most visible securities on the financial landscape. At the end of May 2010, the value of stocks around the world totaled more than $45 trillion and were issued by 45,000 different companies (www.worldexchange.org). Every day in newspapers, on television, and on the Internet, reporters eagerly and with rapt interest describe the ups and downs of the stock market because most believe the stock market is an important indicator of the economy's health and because most Americans have money invested in the stock market—through a direct investment, a mutual fund, or a retirement account. In fact, in a recent Gallup/USA Today poll, more than 60 percent of Americans claimed to have some money invested in the stock market at the end of 2009 (www.gallup.com). Investing in stocks, however, can be very risky. As an owner, a stockholder gets a share of the company's profits. Just like if you owned your own business, however, owners get paid only after everyone else gets paid—employees, suppliers, and anyone who has lent the company money. So when things go bad, owners usually suffer the most. According to the 2009 CreditSuisse Global Investments Returns Yearbook, when world equity markets hit lows in November 2008, stocks worldwide had lost more than $21 trillion, or about $21,000 for every man, woman, and child in the developed world! That wealth simply disappeared—here today, gone tomorrow.