Lecture Notes on Stock Market and Economy

Introduction to Stock Market

• Daily news covers stock market performance, often portrayed as a symbol of economic prosperity.
• The American stock market has been mostly rising for nearly 40 years.
• Stock market growth is often equated with economic health, yet real economic indicators like goods/services production and wages have not kept pace.

How the Stock Market Works

Initial Public Offering (IPO)

• Companies like a lemonade stand can "go public" by selling shares through IPOs.
• Investors buy shares expecting future profits, leading to company growth and dividends.

Stock Trading

• Stocks are traded based on estimated future value.
• Main U.S. Exchanges: New York Stock Exchange (NYSE) and Nasdaq.
• Indexes simplify market performance:
  • Dow Jones: Tracks 30 major companies.
  • S&P 500: Follows 500 large companies.

Evolution of Corporate Structure

• Historically, single individuals controlled companies (e.g., Carnegie, Rockefeller).
• Public trading allowed companies to expand faster by involving more investors.
• Shareholders influence company decisions, promoting innovative and profitable business actions.

Impact of Stock Market on Economy

• Stock markets have historically driven American prosperity, supporting middle-class growth and innovation.
• Famous investor Warren Buffet advocates for index funds as a stable investment strategy.

Speculation and Bubbles

• Stock prices often reflect popular narratives more than actual company value.
• Speculative bubbles, like the dot-com bubble, can lead to economic downturns when they burst.

Corporate Focus on Short-Term Gains

Milton Friedman's Influence

• Promoted shareholder profit as the primary corporate responsibility.
• Led to executive pay based heavily on stock price performance.

Consequences

• Companies prioritize short-term stock price increases (e.g., buybacks) over long-term growth.
• Reduced focus on employee wages and innovation.
• Resulted in factory closures and job losses, harming communities.

Current Trends and Challenges

• CEO compensation has drastically increased compared to average worker pay.
• Growing inequality and decreased middle-class stock market participation.

Potential for Positive Change

• Stock markets can support ethical business practices and long-term societal benefits.
• Shareholders have the potential to influence corporate behavior positively.