Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates, from Irrational Exuberance, 2d ed.^[9] In the preface to this edition, Shiller warns that "[t]he stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing [2005], in the mid-20s, far higher than the historical average. … People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."

Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1^[9], source). The horizontal axis shows the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings). The vertical axis shows the geometric average real annual return on investing in the S&P Composite Stock Price Index, reinvesting dividends, and selling twenty years later. Data from different twenty year periods is color-coded as shown in the key. See also ten-year returns. Shiller states that this plot "confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low."^[9]

The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the market, the price of a stock is directly proportional to the demand. However, there are many factors on the basis of which the demand for a particular stock may increase or decrease. These factors are studied using methods of fundamental analysis and technical analysis to predict the changes in the stock price. A recent study shows that customer satisfaction, as measured by the American Customer Satisfaction Index (ACSI), is significantly correlated to the stock market value. Stock price is also changed based on the forecast for the company and whether their profits are expected to increase or decrease.

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See also

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Notes

1. ^ ^{a b} "Stock Basics", Investor Guide.com.
2. ^ ^{a b} Zvi Bodie, Alex Kane, Alan J. Marcus, Investments, 7th Ed., p. 26–53.
3. ^ Black Scholes Calculator
4. ^ http://www.sjsu.edu/depts/economics/faculty/stringham/docs/stringham-amsterdam.pdf
5. ^ "Devil the Hindmost" by Edward Chancellor.
6. ^ Jones v. H. F. Ahmanson & Co., 1 Cal. 3d)
7. ^ Jones v. H.F. Ahmanson & Co. (1969) 1 C3d 93
8. ^ Whitman, 2004, 5
9. ^ ^{a b c} Shiller, Robert (2005). Irrational Exuberance (2d ed.). Princeton University Press. ISBN 0-691-12335-7. 

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External links

• Stock exchanges at the Open Directory Project
• Stocks investing at the Open Directory Project
• Stock Market Terminology
• Stock Market Trivia: History of Stocks
• Stock Basics Tutorial
• The oldest share in the world, issued by the Dutch East India Company, VOC, 1606.

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