Stock market

where the basic unit of trading is often $ 1 million face value in amount.

However, trades are also done in smaller amounts, and you can buy

Treasuries in lots of $5,000 or $10,000 through a regular broker. U. S.

government bonds are regarded as providing investors with the ultimate in

safety.

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.

Convertible preferred stock carries a similar "conversion privilege". These

securities are intended to combine the reduced risk of a bond or preferred

stock with the advantage of conversion to common stock if the company is

successful. The market price of a convertible security generally represents

a combination of a pure bond price (or a pure preferred stock price) plus a

premium for the conversion privilege. Many convertible issues are listed on

the NYSE and other exchanges, and many others are traded over-the-counter

4.5 Options

An option is a piece of paper that gives you the right to buy or sell a

given security at a specified price for a specified period of time. A

"call" is an option to buy, a "put" is an option to sell. In simplest form,

these have become an extremely popular way to speculate on the expectation

that the price of a stock will go up or down. In recent years a new type of

option has become extremely popular: options related to the various stock

market averages, which let you speculate on the direction of the whole

market rather than on individual stocks. Many trading techniques used by

expert investors are built around options; some of these techniques are

intended to reduce risks rather than for speculation.

4.6 Rights

When a corporation wants to sell new securities to raise additional

capital, it often gives its stockholders rights to buy the new securities

(most often additional shares of stock) at an attractive price. The right

is in the nature of an option to buy, with a very short life. The holder

can use ("exercise") the right or can sell it to someone else. When rights

are issued, they are usually traded (for the short period until they

expire) on the same exchange as the stock or other security to which they

apply.

4.7 Warrants

A warrant resembles a right in that it is issued by a company and gives

the holder the option of buying the stock (or other security) of the

company from the company itself for a specified price. But a warrant has a

longer life—often several years, sometimes without limit As with rights,

warrants are negotiable (meaning that they can be sold by the owner to

someone else), and several warrants are traded on the major exchanges.

4.8 Commodities and Financial Futures

The commodity markets, where foodstuffs and industrial commodities are

traded in vast quantities, are outside the scope of this text. But because

the commodity markets deal in "futures"—that is, contracts for delivery of

a certain good at a specified future date— they have also become the center

of trading for "financial futures", which, by any logical definition, are

not commodities at all.

Financial futures are relatively new, but they have rapidly zoomed in

importance and in trading activity. Like options, the futures can be used

for protective purposes as well as for speculation. Making the most

headlines have been stock index futures, which permit investors to

speculate on the future direction of the stock market averages. Two other

types of financial futures are also of great importance: interest rate

futures, which are based primarily on the prices of U.S. Treasury bonds,

notes, and bills, and which fluctuate according to the level of interest

rates; and foreign currency futures, which are based on the exchange rates

between foreign currencies and the U.S. dollar. Although, futures can be

used for protective purposes, they are generally a highly speculative area

intended for professionals and other expert investors.

5. STOCK MARKET AVERAGES READING THE NEWSPAPER QUOTATIONS

The financial pages of the newspaper are mystery to many people. But

dramatic movements in the stock market often make the front page. In

newspaper headlines, TV news summaries, and elsewhere, almost everyone has

been exposed to the stock market averages.

In a brokerage firm office, it’s common to hear the question “How’s the

market?” and answer, “Up five dollars”, or “Down a dollar”. With 1500

common stocks listed on the NYSE, there has to be some easy way to express

the price trend of the day. Market averages are a way of summarizing that

information.

Despite all competition, the popularity crown still does to an average

that has some of the qualities of an antique–the Dow Jones Industrial

Average, an average of 30 prominent stocks dating back to the 1890s. This

average is named for Charles Dow–one of the earliest stock market

theorists, and a founder of Dow Jones & Company, a leading financial news

service and publisher of the Wall Street Journal.

In the days before computers, an average of 30 stocks was perhaps as

much as anyone could calculate on a practical basis at intervals throughout

the day. Now, the Standard & Poor’s 500 Stock Index (500 leading stocks)

and the New York Stock Exchange Composite Index (all stocks on the NYSE)

provide a much more accurate picture of the total market. The professionals

are likely to focus their attention on these “broad” market indexes. But

old habits die slowly, and someone calls out, “How’s the market?” and

someone else answers, “Up five dollars,” or “Up five”–it’s still the Dow

Jones Industrial Average (the “Dow” for short) that they’re talking about.

The importance of daily changes in the averages will be clear if you

view them in percentage terms. When the market is not changing rapidly, the

normal daily change is less than Ѕ of 1%. A change of Ѕ% is still moderate;

1% is large but not extraordinary; 2% is dramatic. From the market

averages, it’s a short step to the thousands of detailed listings of stock

prices and related data that you’ll find in the daily newspaper financial

tables. These tables include complete reports on the previous day’s trading

on the NYSE and other leading exchanges. They can also give you a

surprising amount of extra information.

Some newspapers provide more extensive tables, some less. Since the

Wall Street Journal is available world wide, we’ll use it as a source of

convenient examples. You’ll find a prominent page headed “New York Stock

Exchange Composite Transactions”. This table covers the day’s trading for

all stocks listed on the NYSE. “Composite” means that it also includes

trades in those same stocks on certain other exchanges (Pacific, Midwest,

etc.) where the stocks are “dually listed”. Here are some sample entries:

|52 Weeks | | |Yld |P-E |Sales | | | |Net |

|High |Low |Stock |Div |% |Ratio|100s |High |Low |Close |Chg. |

|52 |37 5/8|Cons Ed |2.68 |5.4 |12 |909 |49 |48 7/8|49 1/4|+1/4 |

|7/8 | | | | | | |3/8 | | | |

|91 |66 1/2|Gen El |2.52 |2.8 |17 |11924 |91 |89 5/8|90 |-1 |

|1/8 | | | | | | |3/8 | | | |

|41 |26 1/4|Mobil |2.20 |5.4 |10 |15713 |41 |40 1/2|40 7/8|+5/8 |

|3/8 | | | | | | | | | | |

Some of the abbreviated company names in the listings can be a

considerable puzzle, but you will get used to them.

While some of the columns contain longer-term information about the

stocks and the companies, we'll look first at the columns that actually

report on the day's trading. Near the center of the table you will see a

column headed "Sales 100s". Stock trading generally takes place in units of

100 shares and is tabulated that way; the figures mean, for example, that

90,900 shares of Consolidated Edison, 1,192,400 shares of General Electric,

and 1,571,300 shares of Mobil traded on January 8. (Mobil actually was the

12th "most active" stock on the NYSE that day, meaning that it ranked 12th

in number of shares traded.)

The next three columns show the highest price for the day, the lowest,

and the last or "closing" price. The "Net Chg." (net change) column to the

far right shows how the closing price differed from the previous day's

close—in this case, January 7.

Prices are traditionally calibrated in eighths of a dollar. In case you

aren't familiar with the equivalents, they are:

1/8 =$.125

1/4=$.25

3/8 =$.375

1/2 =$.50

5/8 =$.625

3/4=$.75

7/8 =$.875

Con Edison traded on January 8 at a high of $49.375 per share and a low

of $48 875, it closed at $49.25, which was a gain of $0.25 from the day

before. General Electric closed down $1.00 per share at $90 00, but it

earned a "u" notation by trading during the day at $91 375, which was a new

high price for the stock during the most recent 52 weeks (a new low price

would have been denoted by a "d").

The two columns to the far left show the high and low prices recorded

in the latest 52 weeks, not including the latest day. (Note that the high

for General Electric is shown as 91 1/8, not 91 3/8.) You will note that

while neither Con Edison nor Mobil reached a new high on January 8, each

was near the top of its "price range" for the latest 52 weeks. (Individual

stock price charts, which are published by several financial services,

would show the price history of each stock in detail.)

The other three columns in the table give you information of use in

making judgments about stocks as investments. Just to the right of the

name, the "Div." (dividend) column shows the current annual dividend rate

on the stock — or, if there's no clear regular rate, then the actual

dividend total for the latest 12 months. The dividend rates shown here are

$2.68 annually for Con Edison, $2.52 for GE, and $2.20 for Mobil. (Most

companies that pay regular dividends pay them quarterly: it's actually

$0.67 quarterly for Con Edison, etc.) The "Yid." (Yield) column relates tie

annual dividend to the latest stock price. In the case of Con Edison, for

example, $2.68 (annual dividend)/$49.25 (stock price) ==5.4%, which

represents the current yield on the stock.

5.1 The Price-Earnings Ratio

Finally, we have the "P-E ratio", or price-earnings ratio, which

represents a key figure in judging the value of a stock. The price-earnings

ratio—also referred to as the "price-earnings multiple", or sometimes

simply as the "multiple"—is the ratio of the price of a stock to the

earnings per share behind the stock.

This concept is important. In simplest terms (and without taking

possible complicating factors into account), "earnings per share" of a

company are calculated by taking the company's net profits for the year,

and dividing by the number of shares outstanding. The result is, in a very

real sense, what each share earned in the business for the year — not to be

confused with the dividends that the company may or may not have paid out.

The board of directors of the company may decide to plow the earnings back

into the business, or to pay them out to shareholders as dividends, or

(more likely) a combination of both; but in any case, it is the earnings

that are usually considered as the key measure of the company's success and

the value of the stock.

The price-earnings ratio tells you a great deal about how investors

view a stock. Investors will bid a stock price up to a higher multiple if a

company's earnings are expected to grow rapidly in the future. The multiple

may look too high in relation to current earnings, but not in relation to

expected future earnings. On the other hand, if a company's future looks

uninteresting, and earnings are not expected to grow substantially, the

market price will decline to a point where the multiple is low.

Multiples also change with the broad cycles of the stock market, as

investors become willing to pay more or less for certain values and

potentials. Between 1966 and 1972, a period of enthusiasm and speculation,

the average multiple was usually 15 or higher. In the late 1970s, when

investors were generally cautious and skeptical, the average multiple was

below 10. However, note that these figures refer to average

multiples–whatever the average multiple is at any given time, the multiples

on individual stocks will range above and below it.

Now we can return to the table. The P-E ratio for each stock is based

on the latest price of the stock and on earnings for the latest reported 12

months. The multiples, as you can see, were 12 for Con Edison, 17 for GE,

and 10 for Mobil. In January 1987, the average multiple for all stocks was

very roughly around 15. Con Edison is viewed by investors as a relatively

good-quality utility company, but one that by the nature if its business

cannot grow much more rapidly that the economy as a whole. GE, on the other

hand, is generally given a premium rating as a company that is expected to

outpace the economy.

You can't buy a stock on the P-E ratio alone, but the ratio tells you

much that is useful. For stocks where no P-E ratio is shown, it often means

that the company showed a loss for the latest 12 months, and that no P-E

ratio can be calculated. Somewhere near the main NYSE table, you'll find a

few small tables that also relate to the day's NYSE-Composite trading.

There's the table showing the 15 stocks that traded the greatest number of

shares for the day (the "most active" list), a table of the stocks that

showed the greatest percentage of gains or declines (low-priced stocks

generally predominate here); and one showing stocks that made new price

highs or lows relative to the latest 52 weeks.

You'll find a large table of "American Stock Exchange Composite

Transactions", which does for stocks listed on the AMEX just what the NYSE-

Composite table does for NYSE-listed stocks. There are smaller tables

covering the Pacific Stock Exchange, Boston Exchange, and other regional

exchanges.

The tables showing over-the-counter stock trading are generally divided

into two or three sections. For the major over-the-counter stocks covered

by the NASDAQ quotation and reporting system, actual sales for the day are

reported and tabulated just as for stocks on the NYSE and AMEX. For less

active over-the-counter stocks, the paper lists only "bid" and "asked"

prices, as reported by dealers to the NASD.

It is worth becoming familiar with the daily table of prices of U.S.

Treasury and agency securities. The Treasury issues are shown not only in

terms of price, but in terms of the yield represented by the current price.

This is the simplest way to get a bird's-eye view of the current interest

rate situation—you can see at a glance the current rates on long-term

Treasury bonds, intermediate-term notes, and short-term bills.

Elsewhere in the paper you will also find a large table showing prices

of corporate bonds traded on the NYSE, and a small table of selected tax-

exempt bonds (traded OTC). But unless you have a specific interest in any

of these issues, the table of Treasury prices is the best way to follow the

bond market.

There are other tables listed. These are generally for more experienced

investors and those interested in taking higher risks. For example, there

are tables showing the trading on several different exchanges in listed

options—primarily options to buy or sell common stocks (call options and

put options). There are futures prices— commodity futures and also interest

rate futures, foreign currency futures, and stock index futures. There are

also options relating to interest rates and options relating to the stock

index futures.

6. EUROPEAN STOCKMARKETS–GENERAL TREND

Competition among Europe’s securities exchanges is fierce. Yet most

investors and companies would prefer fewer, bigger markets. If the

exchanges do not get together to provide them, electronic usurpers will.

How many stock exchanges does a Europe with a single capital market

need? Nobody knows. But a part-answer is clear: fewer than it has today.

America has eight stock exchanges, and seven futures and options exchanges.

Of these only the New York Stock Exchange, the American Stock Exchange,

NASDAQ (the over-the-counter market), and the two Chicago futures exchanges

have substantial turnover and nationwide pretensions.

The 12 member countries of the European Community (EC), in contrast,

boast 32 stock exchanges and 23 futures and options exchanges. Of these,

the market in London, Frankfurt, Paris, Amsterdam, Milan and Madrid–at

least–aspire to significant roles on the European and world stages. And the

number of exchanges is growing. Recent arrivals include exchanges in Italy

and Spain. In eastern Germany, Leipzig wants to reopen the stock exchange

that was closed in 1945.

Admittedly, the EC is not as integrated as the United States. Most

intermediaries, investors and companies are still national rather than pan-

European in character. So is the job of regulating securities markets;

there is no European equivalent of America’s Securities and Exchange

Commission (SEC). Taxes, company law and accounting practices vary widely.

Several regulatory barriers to cross-border investment, for instance by

pension funds, remain in place. Recent turmoil in Europe’s exchange rate

mechanics has reminded cross0border investors about currency risk. Despite

the Maastricht treaty, talk of a common currency is little more than that

Yet the local loyalties that sustain so many European exchanges look

increasingly out-of-date. Countries that once had regional stock exchanges

have seen them merged into one. A single European market for financial

services is on its way. The EC's investment services directive, which

should come into force in 1996, will permit cross-border stockbroking

without the need to set up local subsidiaries. Jean-Francois Theodore,

chairman of the Paris Bourse, says this will lead to another European Big

Bang. And finance is the multinational business par excellence: electronics

and the end of most capital controls mean that securities traders roam not

just Europe but the globe in search of the best returns.

This affects more than just stock exchanges. Investors want financial

market that are cheap, accessible and of high liquidity (the ability to buy

or sell shares without moving the price). Businesses, large and small, need

a capital market in which they can raise finance at the lowest possible

cost If European exchanges do not meet these requirements, Europe's economy

suffers.

In the past few years the favoured way of shaking up bourses has been

competition. The event that triggered this was London's Big Bang in October

1986, which opened its stock exchange to banks and foreigners, and

introduced a screen-plus-telephone system of securities trading known as

SEAQ. Within weeks the trading floor had been abandoned. At the time, other

European bourses saw Big Bang as a British eccentricity. Their markets

matched buy and sell orders (order-driven trading), whereas London is a

market in which dealers quote firm prices for trades (quote-driven

trading). Yet many continental markets soon found themselves forced to copy

London's example.

That was because Big Bang had strengthened London's grip on

international equity-trading. SEAQ's international arm quickly grabbed

chunks of European business. Today the London exchange reckons to handle

around 95% of all European cross-border share-trading It claims to handle

three-quarters of the trading in blue-chip shares based in Holland, half of

those in France and Italy and a quarter of those in Germany—though, as will

become clear, there is some dispute about these figures.

London's market-making tradition and the presence of many international

fund managers helped it to win this business. So did three other factors.

One was stamp duties on share deals done in their home countries, which

SEAQ usually avoided. Another was the shortness of trading hours on

continental bourses. The third was the ability of SEAQ, with market-makers

quoting two-way prices for business in large amounts, to handle trades in

big blocks of stock that can be fed through order-driven markets only when

they find counterparts.

A similar tussle for business has been seen among the exchanges that

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