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Introduction

“Security prices will fluctuate,” is the classic quote attributed to J. P. Morgan when asked what the stock market would do. He was right, of course. Why? “Supply and demand,” the first-year finance student answers. The student is also right, of course. Why?

Investors need look no further than the reported annual stock price range in any financial publication to observe that stock prices fluctuate. The yearly high is considerably higher than the yearly low. Why?

Is there a conceptual framework underlying the fluctuations? Does supply and demand shift in reaction to basic, underlying causes that can be identified? Is there a generally consistent and repetitive interaction among the causes? Can this framework skeleton be perceived repeatedly through all the noise and emotion associated over the centuries with stock markets and financial asset pricing?

THE CONCEPT OF COMMON STOCK VALUE

What gives a piece of paper, known as common stock, value? What makes an investor exchange cash, which can be used to purchase almost anything, for a share of common stock, which in and of itself can purchase nothing? The physical stock certificate has no purchasing power. There must be some expected reward or future benefit that will entice investors to part with their money in exchange for the stock certificate.



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	Introduction

	“Security prices will fluctuate,” is the classic quote attributed to J. P. Morgan when asked what the stock market would do. He was right, of course. Why? “Supply and demand,” the first-year finance student answers. The student is also right, of course. Why? Investors need look no further than the reported annual stock price range in any financial publication to observe that stock prices fluctuate. The yearly high is considerably higher than the yearly low. Why? Is there a conceptual framework underlying the fluctuations? Does supply and demand shift in reaction to basic, underlying causes that can be identified? Is there a generally consistent and repetitive interaction among the causes? Can this framework skeleton be perceived repeatedly through all the noise and emotion associated over the centuries with stock markets and financial asset pricing?

	THE CONCEPT OF COMMON STOCK VALUE What gives a piece of paper, known as common stock, value? What makes an investor exchange cash, which can be used to purchase almost anything, for a share of common stock, which in and of itself can purchase nothing? The physical stock certificate has no purchasing power. There must be some expected reward or future benefit that will entice investors to part with their money in exchange for the stock certificate.