P/E Ratio

Tells how much investors are paying per dollar of profit

Shows how expensive a stock is Historical average = 14-16 Current average (see WSJ online)

Stock Indexes

Dow Jones Industrial Average Dow Jones Total Stock Market Nasdaq Composite S&P 500 Russell 2000

NY Times Article: New Speed of Money Reshaping Markets Electronic trading used by dozens of

exchanges – NYSE, Nasdaq, BATS Direct Edge in NJ is one of top 4

exchanges CEO = former lawyer for GS Trading done by computers talking to

other computers at high speeds

DE receives up to 10,000 orders a second

Time for average order “round trip” is 98 microseconds (98 millionths of a second)

Exchanges are catering to High Frequency Traders (HFT)

HFT use algorithms to zip in and out of markets

First to react to events Take advantage of mispricing between

stocks or differences in prices across exchanges

Use computers to speed read news reports

Computers interpret the news and make trade decisions

HFT accounts for 56% total stock market trading

Flash Crash May 6, 2010

Dow dropped > 700 points in a matter of minutes

Traced back to a computer trade by Waddell & Reed (mutual fund)

Now have circuit breakers on individual stocks to halt trading if price falls 10% in 5 minutes

Andrew Lo, MIT

Regulations haven’t kept up with rate of change in technology

Too much technology can yield unintended consequences

How much HFT do we really need??? Markets are for capital formation and

long-term investment, not gaming

The Primary Market

Private placement of stock – GS and Facebook

1/21/2011 $1B in Facebook stock sold to foreign investors

Could have raised $5-7B (oversubscribed) Additional $500M sold to Russians in

Dec. (Digital Sky Technologies)

Offering put value of Facebook at $50B Value = Market Cap Worth more than eBay or Yahoo Value was at $10B in 2009

Facebook IPO?

GS private placement structured as special-purpose vehicle, which counts as one shareholder of record

But Facebook announced that intends to increase its number of shareholders above 500 this year

SEC requires private firms with 500 or more shareholders to publicly disclose certain information

Must register as a reporting company within 120 days after the end of the year in which the limit is breached

Deadline for Facebook = April 2012

GS Private Placement limited to foreign investors

Regulation D says private placements cannot be the subject of advertising, general promotional seminars, or public meetings

GS concluded level of media attention was too high to comply with Reg D

Facebook Natural Monopoly?

Business model or technology impossible to replicate

Can extract high profit margins for foreseeable future

Largest community of social networkers Most-visited site in US Deserves valuation closer to Google?

Other IPOs

Groupon – IPO this fall – raise $1B – value $15B

Martha Stewart - 1999 World Wrestling - 1999

Classifications of Financial Markets Debt versus Equity

Money versus Capital

Primary versus Secondary