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| Stock marketStock marketSouthUral State University The Department of Economic and Management Work on subject The Student: Velichko O.S. Group: E&M-263 The Tutor: Sergeeva L.M. Chelyabinsk 1998 Contents 1. Market place 2. Trading on the stock exchange floor 3. Securities. Categories of common stock 1. Growth stocks 2. Cyclical stocks 3. Special situations 4. Preferred stocks 1. Bonds-corporate 2. Bonds-U.S. government 3. Bonds-municipal 4. Convertible securities 5. Option 6. Rights 7. Warrants 8. Commodities and financial futures 5. Stock market averages reading the newspaper quotations 1. The price-earnings ratio 6. European stock markets–general trend 1. New ways for old 2. Europe, meet electronics 7. New issues 8. Mutual funds. A different approach 1. Advantages of mutual funds 2. Load vs. No-load 3. Common stock funds 4. Other types of mutual funds 5. The daily mutual fund prices 6. Choosing a mutual fund
The stock market. To some it’s a puzzle. To others it’s a source of profit and endless fascination. The stock market is the financial nerve center of any country. It reflects any change in the economy. It is sensitive to interest rates, inflation and political events. In a very real sense, it has its fingers on the pulse of the entire world. Taken in its broadest sense, the stock market is also a control center. The phrase “the stock market” means many things. In the narrowest
sense, a stock market is a place where stocks are traded – that is bought
and sold. The phrase “the stock market” is often used to refer to the
biggest and most important stock market in the world, the New York Stock AMEX stands for the American Stock Exchange. It has the second biggest
volume of trading in the US. Located at 86 Trinity Place in downtown The Exchange is non-for-profit corporation run by a board of directors. It costs money it become an Exchange member. There are about 650 memberships or “seats” on the NYSE, owned by large and small firms and in some cases by individuals. These seats can be bought and sold; in 1986 the price of a seat averaged around $600,000. Before you are permitted to buy a seat you must pass a test that strictly scrutinizes your knowledge of the securities industry as well as a check of experience and character. Apart from the NYSE and the AMEX there are also “regional” exchange in
the US, of which the best known are the Pacific, Midwest, Boston and There is one more market place in which the volume of common stock
trading begins to approach that of the NYSE. It is trading of common stock While most of the common stocks traded over-the-counter are those of
smaller companies, many sizable corporations continue to be found on the As there is no physical trading floor, over-the-counter trading is
accomplished through vast telephone and other electronic networks that link
traders as closely as if they were seated in the same room. With the help
of computers, price quotations from dealers in Seattle, San Diego, Atlanta
and Philadelphia can be flashed on a single screen. Dedicated telephone
lines link the more active traders. Confirmations are delivered
electronically rather than through the mail. Dealers thousands of miles
apart who are complete strangers execute trades in the thousands or even
millions of dollars based on thirty seconds of telephone conversation and
the knowledge that each is a securities dealer registered with the National 2. TRADING ON THE STOCK EXCHANGE FLOOR When an individual wants to place an order to buy or sell shares, he
contacts a brokerage firm that is a member of the Exchange. A registered
representative or “RR” will take his order. He or she is a trained
professional who has passed an examination on many matters including The individual’s order is relayed to a telephone clerk on the floor of
the Exchange and by the telephone clerk to the floor broker. The floor
broker who actually executes the order on the trading floor has an
exhausting and high-pressure job. The trading floor is a larger than half
the size of football field. It is dotted with multiple locations called When you first see the trading floor, you might assume all brokers are the same, but they aren’t. There are five categories of market professionals active on the trading floor. Commission Brokers, usually floor brokers, work for member firms. They use their experience, judgment and execution skill to buy and sell for the firm’s customer for a commission. Independent Floor Brokers are individual entrepreneurs who act for a variety of clients. They execute orders for other floor brokers who have more volume than they can handle, or for firms whose exchange members are not on the floor. Registered Competitive Market Makers have specific obligations to trade for their own or their firm’s accounts–when called upon by an Exchange official–by making a bid or offer that will narrow the existing quote spread or improve the depth of an existing quote. Competitive Traders trade for their own accounts, under strict rules designed to assure that their activities contribute to market liquidity. [pic] And last, but not least, come Stock Specialists. The Exchange tries to
preserve price continuity– which means that if a stock has been trading at,
say, 35, the next buyer or seller should be able to an order within a
fraction of that price. But what if a buyer comes in when no other broker
wants to sell close to the last price? Or vice versa for a seller? How is
price continuity preserved? At this point enters the Specialist. The
specialist is charged with a special function, that of maintaining
continuity in the price of specific stocks. The specialist does this by
standing ready to buy shares at a price reasonably close to the last
recorded sale price when someone wants to sell and there is a lack of
buyers, and to sell when there is a lack of sellers and someone wants to
buy. For each listed stock, there are one or more specialist firms assigned
to perform this stabilizing function. The specialist also acts as a broker,
executing public orders for the stock, and keeping a record of limit orders
to be executed if the price of the stock reaches a specified level. Some of
the specialist firms are large and assigned to many different stocks. The In today's markets, where multi-million-dollar trades by institutions So the specialists and the block traders perform similar stabilizing functions, though the block traders have no official role and have no motive other than to make a profit. 3. SECURITIES. CATEGORIES OF COMMON STOCK There is a lot to be said about securities. Security is an instrument
that signifies (1) an ownership position in a corporation (a stock), (2) a
creditor relationship with a corporation or governmental body (a bond), or People who own stocks and bonds are referred to as investors or, respectively, stockholders (shareholders) and bondholders. In other words a share of stock is a share of a business. When you hold a stock in a corporation you are part owner of the corporation. As a proof of ownership you may ask for a certificate with your name and the number of shares you hold. By law, no one under 21 can buy or sell stock. But minors can own stock if kept in trust for them by an adult. A bond represents a promise by the company or government to pay back a loan plus a certain amount of interest over a definite period of time. We have said that common stocks are shares of ownership in corporations. A corporation is a separate legal entity that is responsible for its own debts and obligations. The individual owners of the corporation are not liable for the corporation's obligations. This concept, known as limited liability, has made possible the growth of giant corporations. It has allowed millions of stockholders to feel secure in their position as corporate owners. All that they have risked is what they paid for their shares. A stockholder (owner) of a corporation has certain basic rights in proportion to the number of shares he or she owns. A stockholder has the right to vote for the election of directors, who control the company and appoint management. If the company makes profits and the directors decide to pay part of these profits to shareholders as dividends, a stockholder has a right to receive his proportionate share. And if the corporation is sold or liquidates, he has a right to his proportionate share of the proceeds. What type of stocks can be found on stock exchanges? The question can be answered in different ways. One way is by industry groupings. There are companies in every industry, from aerospace to wholesale distributers. The oil and gas companies, telephone companies, computer companies, autocompanies and electric utilities are among the biggest groupings in terms of total earnings and market value. Perhaps a more useful way to distinguish stocks is according to the qualities and values investors want. 3.1 Growth Stocks. The phrase "growth stock" is widely used as a term to describe what
many investors are looking for. People who are willing to take greater-than-
average risks often invest in what is often called "high-growth"
stocks—stocks of companies that are clearly growing much faster than
average and where the stock commands a premium price in the market. The
rationale is that the company's earnings will continue to grow rapidly for
at least a few more years to a level that justifies the premium price. An
investor should keep in mind that only a small minority of companies really
succeed in making earnings grow rapidly and consistently over any long
period. The potential rewards are high, but the stocks can drop in price at
incredible rates when earnings don't grow as expected. For example, the
companies in the video game industry boomed in the early 1980s, when it
appeared that the whole world was about to turn into one vast video arcade. There is less glamour, but also less risk, in what we will call—for lack of a better phrase—"moderate-growth" stocks. Typically, these might be stocks that do not sell at premium, but where it appears that the company's earnings will grow at a faster-than-average rate for its industry. The trick, of course, is in forecasting which companies really will show better- than-average growth; but even if the forecast is wrong, the risk should not be great, assuming that the price was fair to begin with. There's a broad category of stocks that has no particular name but that is attractive to many investors, especially those who prefer to stay on the conservative side. These are stocks of companies that are not glamorous, but that grow in line with the economy. Some examples are food companies, beverage companies, paper and packaging manufacturers, retail stores, and many companies in assorted consumer fields. As long as the economy is healthy and growing, these companies are perfectly reasonable investments; and at certain times when everyone is interested in "glamour" stocks, these "non-glamour" issues may be neglected and available at bargain prices. Their growth may not be rapid, but it usually is reasonably consistent. Also, since these companies generally do not need to plow all their earnings back into the business, they tend to pay sizable dividends to their stockholders. In addition to the real growth that these companies achieve, their values should adjust upward over time in line with inflation—a general advantage of common stocks that is worth repeating. 3.2 Cyclical Stocks. These are stocks of companies that do not show any clear growth trend, but where the stocks fluctuate in line with the business cycle (prosperity and recession) or some other recognizable pattern. Obviously, one can make money if he buys these near the bottom of a price cycle and sells near the top. But the bottoms and tops can be hard to recognize when they occur; and sometimes, when you think that a stock is near the bottom of a cycle, it may instead be in a process of long-term decline. 3.3 Special Situations. There’s a type of investment that professionals usually refer to as 4. PREFERRED STOCKS A preferred stock is a stock which bears some resemblances to a bond Many preferred stocks are listed for trading on the NYSE and other exchanges, but they are usually not priced very attractively for individual buyers. The reason is that for corporations desiring to invest for fixed income, preferred stocks carry a tax advantage over bonds. As a result, such corporations generally bid the prices of preferred stocks up above the price that would have to be paid for a bond providing the same income. For the individual buyer, a bond may often be a better buy. 4.1 Bonds-Corporate Unlike a stock, a bond is evidence not of ownership, but of a loan to a company (or to a government, or to some other organization). It is a debt obligation. When you buy a corporate bond, you have bought a portion of a large loan, and your rights are those of a lender. You are entitled to interest payments at a specified rate, and to repayment of the full "face amount" of the bond on a specified date. The fixed interest payments are usually made semiannually. The quality of a corporate bond depends on the financial strength of the issuing corporation. Bonds are usually issued in units of $1,000 or $5,000, but bond prices are quoted on the basis of 100 as "par" value. A bond price of 96 means that a bond of $1,000 face value is actually selling at $960 And so on. Many corporate bonds are traded on the NYSE, and newspapers carry a separate daily table showing bond trading. The major trading in corporate bonds, however, takes place in large blocks of $100,000 or more traded off the Exchange by brokers and dealers acting for their own account or for institutions. 4.2 Bonds-U. S. Government U.S. Treasury bonds (long-term), notes (intermediate-term) and bills 4.3 Bonds-Municipal Bonds issued by state and local governments and governmental units are generally referred to as "municipals" or "tax-exempts", since the income from these bonds is largely exempt from federal income tax. Tax-exempt bonds are attractive to individuals in higher tax brackets and to certain institutions. There are many different issues and the newspapers generally list only a small number of actively traded municipals. The trading takes place in a vast, specialized over-the-counter market. As an offset to the tax advantage, interest rates on these bonds are generally lower than on U. S. government or corporate bonds. Quality is usually high, but there are variations according to the financial soundness of the various states and communities. 4.4 Convertible Securities A convertible bond (or convertible debenture) is a corporate bond that
can be converted into the company's common stock under certain terms. |
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