Is Stock Exchange Performance Linked to Business Performance?

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3rd Year Dissertation
Is stock market performance linked to business performance?

Abstract

Still in the heart of an unprecedented financial crisis, new questions came up about the working of the stock market. In the eyes of general public the stock market can seem a lot like gambling to the extent that this one was reconsidered. The stock market index seems to be valuating at random, especially since the last financial crisis. But the fact that stock market plays an important role in the health of the economy turn impossible this though from general public, which leads us to ask the following question: how the stock market is influenced? We will adopt a general approach and focus on the probable influence of business performance on stock market performance. In order to do so, we collected information and date from Standard and Poor’s source and from specialized source.

Executive summary
The first modern stock market, today called the New York Stock Exchange (NYSE) was established in 1792 in New York City . The purpose of the stock market is to give the opportunity to companies to open themselves up to public investment in order to raise capital. The stock market is composed of a primary market and a secondary market. The primary market is where a company sells shares for the first time or issues new ones. In the secondary market investors trade securities or assets with other investors, the cash proceeds from transactions go to the investors instead of the company. At this point companies do not have direct control over their stock’s price. There are several areas of influences that affect the stock’s price, which are the wider environment, the supply and demand driven by investors confident, government monetary policy, the Gross Domestic Product (GDP), the unemployment and the Fisher Effects. When these influences are understand it is helpful to predict the stock’s price forecast in order to buy or sell. However, even if companies do not have direct control over their stock’s price, there is a link between these factors that influence the stock market performance and the business performance. Our research and findings demonstrate that stock market performance is linked to business performance. This is do not mean that the market is efficient. However, stock’s prices are highly influenced by financial statement released by companies.

Table of Contents
Introduction4
I.Primary – secondary market7
A.Definition7
B.Primary market7
C.Secondary market8
II.Stock market index10
A.Definition10
B.The S&P 500 and corporate profits11
III.Calculating the stock price14
A.Expected Return14
B.Discounted Cash Flow15
C.Stock pricing through the dividend Discount Model (DDM)15 D.Price earning ratio: (P/E ratio).16
E.Price-book ratios: (P/B ratio)16
IV.The issuing of financial reports18
A.Definition18
B.Impact of the issuing of financial reports on stock’s price18 C.The impact of financial reports on supply and demand19
D.The Industry analysis20
V.Market efficiency hypothesis21

Introduction
What factors can affect the value of a stock? “Anything that happens during the day, e.g. new information enters the market stream all day long.” - Ben Bernanke. Still in the heart of an unprecedented financial crisis, new questions came up about the working of the stock market. In the eyes of general public the stock market can seem a lot like gambling to the extent that this one was reconsidered. Indeed, on one hand some stock market index such as the CAC40 has lost nearly 55% in barely 14 months between January 2008 and March 2009 . On the other hand equity portfolios have lost value in such a way that major companies as Lehman Brother collapsed. Confronted to this failure, financial institutions as well as stock markets had to clear up some dark spots such as the working of the hedge funds and the mortgage-backed security. To better understand the working of the stock...
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