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FINANCIAL LITERACY WORK READINESS ENTREPRENEURSHIP
Introduction
On October 9, 2007, the Dow Jones Industrial Index, a popular
measure of the overall movement in stock prices, hit a record high of
14,164. On November 20, 2008, just 13 months later, the Dow closed at
7,552, down 47percent from the peak. Why did stock prices decline so
much? What impact is the decline having on the economy? Is the decline
a sign that we are on the brink of another Great Depression? What,
if anything, should the federal government do to arrest the decline?
Daunting questions to be sure; to move toward some answers, lets start
by reviewing some basics.
Back to Basics
Most major corporations in the United States are publicly owned.
is means that at some time in the past the founders of a particular
company oered stock to the public. More precisely, the founders sold
their ownership in the company to the public; the public acquired the
common stock, or ownership shares, also called equity, in the company,
and the original owners received money for selling some or all of their
ownership shares. e purchasers of the stock have acquired a share of the
earnings and assets of the company.
What is a share of stock worth?
What would you be willing to pay per share to acquire one or even
50,000 shares of stock in a company? Just stop for a minute and think
about the basics noted in the previous paragraph; I hope you said to
yourself, it depends. If you did, you are correct. e next question to
ask is what does it depend on? e general answer, but one that yields
all the real insight you need, is that it depends on what return you could
earn by investing your money elsewhere, say on treasury bonds yielding
5 percent per year issued by the U.S.
government, and what you expect
you could earn by acquiring stock in
a company (or group of companies).
To anticipate what we will discuss
in more detail, it should be readily
apparent that if you expect stock prices
to decline, whatever the reason, you
probably will decide to hold less stock
Dow Jones Industrial
Index: The Dow, for short, is
the sum of the daily closing
prices of the 30 largest U.S.
companies. The companies
that make up the Dow are
selected by Dow Jones
& Company, which also
publishes The Wall Street
Journal. Those companies
included in the index change
over time to reect changes
in corporate America. Some
of the companies included
currently are Boeing, Exxon
Mobil, Home Depot, Wal-Mart,
and Walt Disney.
Written by Raymond Lombra
Professor of Economics, Pennsylvania State University