|Stock Market Primer|
Right now, the New York Stock Exchange has billions of dollars changing hands every day, with thousands of companies being traded, and millions of people being affected. If we trace the roots of the New York Stock Exchange to its beginning, we would find that it started out as dirt path in front of Trinity Church in East Manhattan 200 years ago. At that time, there was no paper money changing hands, or even the idea of stocks. Rather, they traded silver for papers saying they owned shares in cargo, that was coming in on ships every day. The trade flourished.
During the American Revolution, the Colonial Government needed money to fund its wartime operations. One way they did this was by selling bonds. Bonds are pieces of paper a person buys for a set price, knowing that after a certain period of time, they can exchange their bonds for a profit. Along with bonds, the first of the nation's banks started to sell parts or shares of their own companies to people in order to raise money. In essence they sold off part of the company to whomever wanted to buy it, which is the essence of the modern day stock market.
Wall Street was becoming a major center of these transactions, and in 1792 twenty-four men signed an agreement that started the New York Stock Exchange (NYSE). They agreed to sell shares or parts of companies between themselves and charge people commissions, or fees, to buy and sell for them. They found a home at 40 Wall Street in New York City. As they grew they later moved into what is currently the New York Stock Exchange Building.
The 1900s brought the Industrial Revolution, and along with it, a boom in Wall Street. Everybody wanted a piece of the action, and Wall Street grew. The New York Stock Exchange was not the only way to buy stocks at that time. Many stocks that were deemed not good enough for the NYSE, were traded outside on the curbs. This so-called "curb trading," has now become the American Stock Exchange (AMEX).
Today, the New York and the American Stock Exchanges, have been joined by the NASDAQ, and hundreds of local and international Stock Exchanges, that all play a part in the national and global economy.
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How It Works
Lets say you hear a tip that "Company A" is coming out with a brand new product that is supposed to double their business. You think to yourself, "Darn, I wish I owned that company." Well you can. "Company A", along with thousands of other companies, lets the public buy part of its company. It does this through selling shares. A share is simply a piece of paper that says you own part of a company. This part is usually extremely small, perhaps thousandths of a percent of the total company, but, hey, it is a beginning. You decide you want to buy part of "Company A". You run home, and count up all of the money you have been saving, and find out you have 20,000 pesos. Well you are not going to be able to buy the whole company, but it is a start.
You've got the money, you know what stock you want to buy, now what? Do you go to the grocery store and ask for a dozen shares of "Company A". Not exactly, but close. You don't go to a grocery store, but rather you call a broker. A brokerage house is your supermarket of stocks. You call up any broker and say, "Tony, I've got 20,000 pesos, and want to buy as much "Company A" as I can."
Tony in return tells you, "Let's see, a share of "company A" costs 2 pesos, and I am going to charge you 1% for my services, so you can buy 10,000 shares of "Company A". " You then give Tony the money, and you get the stock. (They usually don't give you the paper stock certificates, but they transfer ownership over to you.) Voila, you have just bought stock in a company!
Sounds simple enough, right? Actually it is not if you look at it from the broker's point of view. When you told the broker you wanted those so much shares of stocks, he did not magically buy them for you, or already own them. Rather, he sent a message to another person who is working down on the floor of the Philippine Stock Exchange (or any other stock exchange). He tells this person to buy these stocks for you. This person is called a "Floor Broker."
Now this person goes to the part of the Stock Exchange that is allotted to this particular stock. Here there are companies that specialize in this stock. This means that they will usually, if not always, buy and sell from people at the normal price. The floor broker then buys your 10,000 shares from one of these people, reports his trade through the hundreds of computers on the floor, then reports to his colleagues back at the brokerage house that he bought the stock. The broker keeps a record that you own that stock, rather than sending you the actual paper stock certificates. If you ever want to sell them, your broker will sell them, deduct his commission, and then give you the money.
Got all that? Well if you did not, here it is again using a simplified example. When you want a stock, you call a broker. The broker calls a person on the floor (usually an employee of the broker). This person runs to the space that is allotted to this stock. He then buys the amount of stock from the specialists, or companies, that are there to sell and buy on a regular basis. He then tells the firm he bought it, and then you have your stock.
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Well it was pretty easy to buy a few shares of "Company A", but what if you are not sure about which stock you should buy? Maybe you would rather let a professional choose the stocks for you. Well, you are not alone. Millions of people turn over control of their finances to professionals by buying Mutual Funds. There are two types of mutual funds, open and closed.
Open mutual funds, such as Phil Equity, let people put their money in them, just like a bank. The difference is that banks take your money and lend it out, and then pay you interest on the money you gave it. This is static, in that it does not change. When you put your money in, the bank usually says we will give you 3 percent interest. When you put your money in a mutual fund, they take that money, along with that of millions of other people who are investing, and buy stocks and bonds with it. They then take out part of the profits for themselves, a commission, and give you your share.
Closed end mutual funds, are similar to their open counterparts in that you turn over control of your money to professionals but, rather than putting money in them like a bank, you buy shares like a stock. This means that a closed end mutual fund acts just like any other stock on the Stock Exchange, they have Ticker Symbols, and are traded. The difference is that these mutual funds, instead of making burgers, or creating airplanes, take the money they have, invest it, and return the profits to the share holders.
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Well, we have now learned how to hand over money to people, in exchange for stocks, but what is to stop them from cheating you, or from running off with your hard earned 20,000 pesos that was supposed to go to "Company A"? Well to keep brokers honest, the government has put into place many commissions, and organizations. Of these organizations the major player is the Securities Exchange Commission (SEC).
The SEC is a government agency whose purpose is to regulate the securities industry (the stock markets). This agency decides what is legal, and prosecutes those who break the rules, along with setting many standards for brokers and investors alike. All companies traded on the many stock exchanges around the world have to be registered with their respective SEC. Each must follow rules about what they can do with their stock, how they can advertise, make public their records and much more.
Most of the rules placed on companies are to prevent the owners and employees from using insider information. Insider information is information that a person obtains about a company that is not available to the rest of the public, that can be used to their advantage while buying stocks. For example, lets say you are the CEO of company XYZ, and company ABC is now in negotiations with you to merge, and create a much larger company called GHI Inc. Now, usually mergers cause stock prices to go up, so if you, knowing that a merger is going to take place, go out and buy a lot of stock from both company ABC, and XYZ, you are using insider information, and are breaking the law.
SEC rules and regulations not only pertain to companies on the Exchange, but to the brokers that trade, and to you, the investor. As an investor, you too, cannot buy stocks knowing information about a company that know one else knows. Brokers get the heaviest burden of rules and regulations from the SEC. Most of these rules are to protect you, the investor. An example of one of these rules is that when a floor broker goes to buy a stock on your behalf , he must buy from the lowest priced bidder, and when he is selling, he must sell it to the highest price bidder. Sounds like common sense, but in fact it is not. Floor brokers, could easily sell your stock really low to another broker, in exchange for them selling you a different stock really cheap, to give a better customer a better price. This would not be fair to you, being sacrificed to give another person a better price.
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You were right to follow your hunch with "Company A". Your 20,000 pesos has skyrocketed into 30,000 pesos over a few years. Well, you've been checking the stock price recently and today, when you go get the newspaper, the headline reads "CRASH!". You read on and discover that the stock market has just dropped around 500 points, not to mention the fact that "Company A's" stock value which has been slashed in half. You can't believe it- years of work, all gone, in one day.
One major reason for the crash is fear. Fear of a correction. Fear of a drop. Fear of being too late to get out. In America the 1980s had brought large stock increases, people had been making fortunes on the huge surges in the stock market. People began to fear that the market wouldn't be able to go up forever, and eventually it would fall, and create what is called a correction. The fear began to accumulate around October 15th, when The Wall Street Journal published an article entitled, "Stocks May Face More than a Correction." It voiced fear that a correction would bring on a landslide. People began to listen, and big investment brokers began to worry. The SEC and NYSE listened too. They even talked about closing the market on the 19th when there was worry that the crash would come. Even though they decided to keep the market open, news of a potential collapse was the straw that broke the camel's back. The morning of 1987, began with a quick loss of around 150 points. Although, the market did rebound a little before noon, the landslide had begun, and the market was losing too fast to hold back. Many of the specialists, whose job it is to negotiate the trades between sellers and buyers, were going out of business, because the rules state that they must purchase stocks that cannot be sold. In the end, the market plunged, and after the closing bell rang in the NYSE, there was silence between the brokers. People were speechless, many broke.
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Why does the stock market go up and down? Theses fluctuations occur partly because companies make money, or lose money, but it is much more involved than that. A stock is only worth what someone will pay for it. Usually, if a company makes a lot of money, its value rises, because people are willing to pay more for a company's stock if the company is doing well. There are many other factors that affect the value of stocks. One example is interest rates, or the amount of money you have to pay a bank to loan money, or how much it has to pay you to keep your money in their bank. If interest rates are high, stock prices generally go down, because if people can make a decent amount of money, by keeping their money in banks, or buying bonds, they feel like they should not take the risk in the stock market.
Many other factors have an effect on the stock market for example, the state of the economy. If there is more money floating around, there is more flowing into companies making their prices rise. Yet another factor is time of year, and publicity. Many stocks are seasonal, meaning they do well during certain parts of the year, and worse during others. An example is an ice company, the ones that package ice that you buy at the supermarket. During the summer, with picnics, and sweltering heat, their product sells well, and thus their stock price goes up; But during the rainy season, when people are not as interested in a picnic with the wet weather, their price goes down. Publicity has an effect on stock prices. If an article comes out saying that company ABC, has just invented this new type of ice that will revolutionize the industry, odds are their price will increase. Conversely, if an article comes out saying that company ABC's president is a crook, and stole the pension funds, it is a good bet that the price will go down.
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Buying and Selling
The first step when buying stocks is to decide what company to buy stock in. You can buy stock in any publicly held corporation, which means that the public can control the corporation. You cannot buy stock in a privately held or closely held corporation, which are corporations that are controlled either by a small group of individuals or by close friends and family. Fortunately, most of the larger companies are publicly held, and you can buy from them. When selecting a company to invest in, you should make sure they are in a strong industry, and make sure the company is strong or growing. For example, Ayala Land Inc. is a large company that is one of the strongest in the real estate industry. This would make it a good stock to invest in, although finding a newer company that is growing rapidly might get you more profits quicker. Choosing the company to invest in is no easy job, and there are many different methods people have come up with to select one. Fundamental analysis is one method, in which you study the company's current management and position in the market. Technical analysis is another method which is totally based on charts, in which you indentify trends the company has, and invest accordingly. Basically tells you when to buy and when to sell. A technical analyst uses graphs and charts containing historical data of the price movement of stocks. One popular method is just throwing darts at the stock page, which often beats out all the other methods.
After you decide what company to invest in, you need to find a broker. A broker is the only person that can make an order to buy or sell stocks. There are two types of brokers that every brokerage firm has. The first type of broker is a stockbroker, who researches investments, helps make goals, and give advice on investing. Discount brokers on the other hand, do not offer advice, and they do no research. They just are middle men in the transactions. When you give a stockbroker your order, they relay the order to the floorbrokers. The floorbrokers do all the actual buying and selling, and they hold a seat on the exchange.
After you find a broker and buy the stocks, the broker does the rest of the work. You just have to call him up and place an order with him. The most basic order is the market order, where you just ask the broker to buy or sell your stocks at the best price he can get his hands on. Another type of order which takes more research and predicting on your part is a limit order. In a limit order, you tell the broker to trade only when the stock is at a certain price or better. A stop order is an order which can save you from extreme loss. In a stop order, you tell the broker to sell your shares if the stock drops too low, and you tell him the price not to let it drop below.
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To track how your stocks are doing, you have to look at stock listings. Stock listings are published in just about every newspaper. The listings look confusing at first, since they look like a mixture of numbers, but can be a very useful tool when tracking your stock's progress. The listings are organized into many columns, including the following information : 52 weeks high and low, company name, symbol, dividend, percent yield, PE ratio, volume, high, low, close and net change.
52 weeks high and low this field is a good indicator about a stocks volatility. Volatility is an indicator of the riskiness and potential for profit that the stock has. The greater the difference between the high and low, the riskier the stock is for loss and gain. If the difference between the high and low is small, then there is little potential for either loss or gain.
Company name - This field is usually abbreviated in the listings, and listed alphabetically.
Symbol - This field is a one to four character symbol used as a sort of nickname for the company.
Dividend - This field is listed in dollar format, and it is the cash amount of money that the company will pay you each year for each stock.
Percent yield - This field is calculated by dividing the dividend by the closing price. It just tells you how much of the price of the stock you will be paid in dividends each year.
PE ratio - The price-earnings ratio calculates the relationship between the price of a company's stock, and the annual earnings of a company. It is calculated by dividing the closing price of the stock by the earnings per share of each stock.
Volume - The volume is the amount of stocks that were traded the day before. This number is given in hundreds, so to get the actual number of stocks traded, multiply the number in that field by one hundred. If a small z is before the number, then the volume is not given in hundreds, and is the actual number of stocks traded.
High, low and close - These are the highest and lowest prices of the stock the day before, and the closing price for the day before. This is an indicator of how much the price of the stock fluctuated throughout the previous day.
Net change - This is the change of the price of the stock from the previous day. This gives you an idea whether the price is dropping or rising.
In addition to the stock listings, stock price charts can sometimes offer a better view of how the stock is doing. The price charts graphically organize the value of the stock over time. The charts can give you information on the company's historical performance, the stock's stability or volatility, the stock's current price relative to the past, and the stock's growth rate.
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There are several "tricks" that experienced investors use to make a profit. Like the rest of the stock market, these tricks are very risky, and you should know what you are doing if you use these tricks. The tricks include selling short, buying on margin, and buying warrants.
The first risky trick is short selling. Basically, short selling is selling a stock before you actually buy it. To sell short, you first borrow stocks from a broker. Then, you sell them immediately on the market. You keep the money that you earned from selling the stocks, and wait, hoping that the price for the stock will drop. If the price for the stock does drop, then you can buy back the stock, and give them back to your broker. You will then have made a profit, since you sold them for more than you bought them for. For example, if you borrow 100 stocks at 4 pesos per stock, and sell them in the market, you have 400 pesos. If you wait a while, and the price of the stock decreases to 2 pesos per stock, you can buy 100 stocks for 200 pesos. You then return the 100 stocks to the broker, pay a little bit of interest, and keep the other 200 pesos. Unfortunately, selling short does not always end as well as that. Consider if you borrow 100 stocks at 4 pesos a stock again. You then sell them and get 400 pesos. You wait a few weeks, but the price of the stock continues to increase. Before you know it, the price of the stock is 6 pesos. You have to give the broker his stocks, and you have to pay him interest. This means that you have to pay 600 pesos to get the stocks back, and right there, you just lost 200 pesos.
Buying on margin is another trick which is basically buying stocks on borrowed money. You must first set up a margin account, which has a minimum balance of 20,000 pesos. Once you have a margin account, you can borrow up to 50 percent of the cost of buying the stocks you want. By borrowing 50 percent of the cost, you are controlling something twice as valuable as what you paid for. This will enable you to gain more profits with less money. For example, if you put in 20,000 pesos, and the broker lends you 20,000 pesos, then you have 40,000 pesos to work with. You then buy 1,000 shares at 40 pesos a share. If the price for the stock increases to 50 pesos, and you sell at that price, then you have 50,000 pesos. You then pay back the broker the 40,000 pesos plus interest, and you have made roughly 10,000 pesos, doubling your earnings for an initial investment of 20,000,. If you had only invested 20,000 pesos of your own money, you would have only gotten 500 shares. Then, after selling them for 50 pesos, you would have made only 5,000 pesos. The risky part about this is that your losses are also magnified. Had you bought 1,000 shares on margin at 40 pesos, and the price had dropped to 20 pesos, you would have lost all 20,000 of your pesos, since you have to pay the broker back his 20,000 pesos. If you had invested only your 20,000 pesos and bought 500 stocks at 40 pesos, and the price dropped to 20 pesos, then you would only have lost 10,000.
Buying warrants is a less risky trick. A warrant is sold by a company that is planning on issuing stocks soon. The warrant gives you the right to buy stocks at a certain price. For example, if you buy a warrant to buy a stock at 5 pesos for 1 peso, and the stock ends up being issued at 10 pesos a share, then you can sell the shares for a profit of 4 pesos per share, since you paid only 6 pesos total, and sold them at 10 pesos.
Section II Source : EduStock http://tqd.advanced.org/3088/