equity finance - raising funds through stocks/shares  

• debt finance - raising funds through bonds/loans
• dividends - paid from firm's profits to stockholders
  • bonds pay predetermined amounts
  • profits increase >> dividends increase
• stock markets represented nominally >> real value could decrease even as nominal value increases

stock price - equal to present value of future expected dividends  

• $Qt = $Dt+1 / (1+it) + $Dt+2 / [(1+it)(1+it+1)] + ...
  • same relationship when converted to real value and real interest rates
• higher expected future dividends >> higher real stock price
• higher current/expected real interest rates >> lower real stock price
• expecting high stock price later >> high current stock price
  • random walk - w/ each step equally likely, mov'ts unpredictable
  • major mov'ts really can't be predicted
• predictions based on expected policy/social/gov't shifts

effect of monetary expansion on stock market  

• money increase >> LM curve shifts down >> equilibrium output increases, interest decreases (both briefly)
• stock market already anticipates move >> no effect on stock market
• stock market doesn't anticipate move >> stock prices increase
  • expansion lowers interest rate and increases output (dividends)

effect of increased consumer spending on stock market  

• sending increase >> IS curve shifts right >> output increases, interest increases (both in short term)
• output increase >> higher stock prices
  • interest increase >> lower stock prices
• final, net outcome depends on LM slope
  • flatter LM curve >> output increase dominates >> higher stock prices
  • steeper LM curve >> interest increase dominates >> lower stock prices
• monetary reaction - Fed may choose to accomodate IS shift
  • Fed accomodates shift >> increases money supply to keep interest rates from increasing >> stock prices rise for sure
  • Fed chooses to do nothing >> stock prices may increase or decrease
  • Fed counteracts inflation >> monetary contraction >> output stays constant, interest rises >> stock prices drop for sure

fundamental value - present value of expected dividends  

• actual stock prices not equal to fundamental value >> sometimes underpriced or overpriced
• stock prices can increase as long as investors expect stock prices to increase
• rational speculative bubbles - growth of stock prices based on speculation
  • prices above fundamental value (even if fundamental value is 0)
  • investors expect to be able to sell stock at a higher value in a following year
• fads - deviations from fundamental value due to past success