Introduction
Financial trading markets can seem deeply puzzling. Central features conspicuously depart from how most markets work. This makes their study particularly interesting, but it also means there are many ways in which an unwary observer may stumble. For instance, voluntary trade is typically thought to leave both parties better off, but trade in financial markets also has a distinctively zero-sum aspect. Whereas many market transactions involve the consumption of goods that provide personal utility, transactions in financial markets involve the pursuit of claims on future cash flows and control rights. Financial trading markets are also distinguished by their great social importance, particularly the market for corporate equities, which is the primary subject of this book. The U.S. stock market’s total valuation is about $25 trillion—almost double the total assets held by the commercial banking system.1 The stock market is the principal vehicle for the direct and indirect investment of public savings, representing roughly half of the value of the dollars saved. Its functioning is critical to the process by which changes of control in major companies take place. Famously, prices in the stock market incorporate enormous amounts of information and serve as important guides to decision making throughout the economy. For all these reasons, the stock market remains a potent national symbol of trade and commerce.