Stock Market

The term "stock market" refers to a large number of markets worldwide in which shares of stock are bought and sold. In 1999 there were 142 such markets in major cities around the world, where hundreds of millions of shares of stock changed hands daily.

Some stock trading takes place in traditional markets, where representatives of buyers and sellers meet on a trading floor to bid on and sell stocks. The stocks traded in these markets are sold to the highest bidder by auction. Increasingly, however, stocks are traded in markets that have no physical trading floor, but are bought or sold electronically.

Electronic stock trading involves networks of computers and/or telephones used to link brokers. Stock price is determined by negotiation between representatives of buyers and sellers, rather than by auction. Hence, these markets are called "negotiated markets." All the stock exchanges around the world, including auction markets at centralized locations and electronic negotiated markets, are collectively called the stock market.

Shares of stock are the basic elements bought and sold in the stock market. In order to raise working capital, a company may offer for sale to the public "shares" or "portions of ownership" in the company. These shares are represented by a certificate stating that the individual owns a given number of shares. Revenue from this initial public offering of stock goes to the issuing corporation.

Investors buy stock hoping that its value will increase. If it does, the shareholder may sell the stock at a profit. If the stock price declines, selling the stock results in a loss for the stockholder. The issuing company does not receive any income when stocks are traded after the initial public offering.

The Price of Stocks

A stock is worth whatever a buyer will pay for it. Because stock market prices reflect the varying opinions and perceptions of millions of traders each day, it is sometimes difficult to pinpoint why a certain stock rises or falls in price. A wide range of factors affects stock prices. These may include the company's actual or perceived performance, overall economic climate and market conditions, philosophy and image projected by the firm's corporate management, political action around the world, the death of a powerful world leader, a change in interest rates, and many other influences.

Investors bid on a stock if they believe it is a good value for the current price. If there are more buyers than sellers, the price of the stock rises. When investors collectively stop buying a given stock or begin selling the stock from their portfolios, the stock price falls.

Understanding Stock Tables

Perceptions of a stock's value are further shaped by information that is available in the financial press, at financial web sites, and from brokers either online or in person. Most major newspapers print this information in stock tables. Some stock charts are printed daily; others contain weekly or quarterly summaries of trading activity.

Because each stock table reports data from only one stock exchange, many sources print more than one table. Although the format varies, most stock tables contain, at a minimum, certain important figures.

The high and low prices for the stock during the last 52 weeks, shown in the first two columns of the table above, are indicators of the volatility of the stock. Volatility is a measure of risk. The more a stock's price varies over a short time, the more potential there is to make or lose money trading that stock.

Although the prices of all stocks go up and down with market fluctuations, some stocks tend to rise more quickly and fall more sharply than the overall market. Other stocks generally move up and down more slowly than the market as a whole.

In the United States, stock prices are traditionally reported in eighths, sixteenths, or even thirty-seconds of a dollar.* This practice dates from the time when early settlers cut European coins into pieces to use as currency. Goodrich's 52-week high of 45¼ in the above example means the highest trading price for this stock in the last year was $45.25.

*Stock exchanges are increasingly moving to decimal notation.

The third column in the table holds an abbreviated name for the stock's issuing corporation. Some financial papers also print the ticker symbol, a very short code name for the company. Brokers often use ticker symbols when ordering or selling stock. Ticker symbols are abbreviated names; for example, "GM" is used for General Motors or "INTC" for Intel, depending on which stock market exchange is being consulted.

The total cash dividend per share paid by the company in the last year is found in the fourth column of the table. The company's board of directors determines the size and frequency of dividends. Traditionally, only older and more mature companies pay dividends, whereas smaller, new companies tend to reinvest profits to finance continued growth. Some dividends are paid in the form of additional stock given to shareholders rather than in cash. Stock tables do not report the value of these non-cash dividends.

The dividend-to-price ratio, or yield, is shown in the table's fifth column. This is the annual cash dividend per share divided by the current price of the stock and is expressed as a percentage. In this example, Goodrich's closing stock price of $27.50 divided into the annual dividend of $1.10 shows

a current yield of 4 percent. Yield can be used to compare income from a particular stock with income from other investments. It does not reflect the gain or loss realized if the stock is sold.

The price-to-earnings ratio (P/E ratio) is the price of the stock divided by the company's earnings per share for the last twelve months. A P/E ratio of 18 means that the closing price of a given stock was eighteen times the amount per share that the firm earned in the preceding twelve months.

Volume in a stock table is the total number of shares traded in the reported period. Daily volumes are usually reported in hundreds. This chart shows a trading volume of 195,300 shares of Goodrich stock. Unusually high volumes can indicate either that investors are enthusiastic about a stock and likely to bid it up, or that wary stockholders are selling their holdings.

The next three columns show the high, low, and closing price for a particular trading period, such as a day or a week. The final column reports the net change in price since the last reporting period. In this daily chart, the closing price for Goodrich stock was 1¾ ($1.75) lower than the previous day's close, whereas Goodyear closed of a dollar ($0.6875) higher.

Stock Exchanges

The New York Stock Exchange, sometimes called the "Big Board," is the largest and oldest auction stock market in the United States. Organized in 1792, it is a traditional market, where representatives of buyers and sellers meet face to face. More than 3,000 of the largest and most prestigious companies in the United States had stocks listed for sale on the NYSE in early 2000, and it is not unusual for a billion shares of stock to change hands daily, making it by far the busiest traditional market in the world.

Requirements for a corporation to list its stock on the NYSE are stringent. They include having at least 1.1 million publicly traded shares of stock, with an initial offering value of at least 40 million dollars. The American Stock Exchange (AMEX) in New York and several regional stock exchanges are traditional markets with less stringent listing requirements.

The NASDAQ is an advanced telecommunications and computer-based stock market that has no centralized location and no single trading floor. However, more shares trade daily on the NASDAQ than on any other U.S. exchange. The NASDAQ is a negotiated market, rather than an auction market. Nearly 5,000 companies had stocks listed on the NASDAQ in 1999. Companies listing on the NASDAQ range from relatively small firms to large corporations such as Microsoft, Intel, and Dell.

Stocks not listed on any of the exchanges are traded over the counter (OTC). They are bought and sold online or through brokers. These are generally stocks from smaller or newer companies than those listed on the exchanges. Stocks in about 11,000 companies are traded in the OTC market.

Stock Market Indexes

A large number of indexes, or summaries of stock market activity, track and report stock market fluctuations. The most widely known and frequently quoted index is the Dow Jones Industrial Average (DJIA). The DJIA is an adjusted average of the change in price of thirty major industrial stocks listed on the NYSE.

Another widely used stock market index is the Standard and Poor's 500 (S&P 500). It measures performance of stocks in 400 industrial, 20 transportation, 40 utility, and 40 financial corporations listed on the NYSE, AMEX, and NASDAQ. Because of this, many analysts feel that the S&P 500 gives a much broader picture of the stock market than does the Dow Jones.

Indexes for the NASDAQ and AMEX track the performance of stocks listed on those exchanges. Lesser known indexes monitor specific sectors of the market (transportation or utilities, for example). The Wall Street Journal publishes twenty-nine different stock market indexes each day.

see also Economic Indicators.

John R. Wood and

Alice Romberg Wood

Bibliography

Case, Samuel. The First Book of Investing. Rocklin, CA: Prima Publishing, 1999.

Dowd, Merle E. Wall Street Made Simple. New York: Doubleday, 1992.

Morris, Kenneth M., and Virginia B. Morris. Guide to Understanding Money & Investing. New York: Lightbulb Press, 1999.

UNPRECEDENTED CLOSURES OF FINANCIAL STOCK MARKETS

On Tuesday, September 11, 2001, terrorist assaults demolished the World Trade Center in New York City and damaged the Pentagon in Washington, D.C. These attacks on the structure of the U.S. financial and governmental systems led to the closing of the U.S. stock markets, including the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX).

These financial stock exchanges reopened the following Monday after remaining shut down for the longest period of time since 1929.