stock market stock market articles for students
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stock market stock market articles for students
Introduction Library of Congress, Washington, D.C. Justin Guariglia—xPACIFICA/Redux “Wall Street Lays an Egg,” a headline in Variety announced in October 1929. In that understated sentence the show-business newspaper was saying that the New York stock market had collapsed. Beginning on October 24—remembered as Black Thursday—and culminating in an even blacker Tuesday, October 29, the value of securities dropped more than 26 billion dollars. Before the end of November 1929 the nationwide loss exceeded 100 billion dollars. Over the next few years the nation, and the rest of the world, slowly sank into the Great Depression . The crash of 1929 was never far from the minds of those who had experienced it. Although governmental safeguards had been erected, there was always the fear that a crash could happen again. On Monday, Oct. 19, 1987, it did. The 1987 stock market collapse, a fall of 508 points in the Dow Jones industrial average, cut the value of securities by more than half a trillion dollars. The total decline for October 1987 was 769 points. Although the point and dollar drops were far larger than those of 1929, the loss in terms of percentage of the market was smaller. also represents ownership in a corporation. Holders of preferred stock are entitled to dividends before the common stockholders are. If the company is liquidated, the preferred stock is paid off before the common stock is, but after the bonds are. Choose a language from the menu above to view a computer-translated version of this page. Please note: Text within images is not translated, some features may not work properly after translation, and the translation may not accurately convey the intended meaning. Britannica does not review the converted text. The greatest volume of trading is done by the exchanges. In the United States the New York Stock Exchange has more trading volume than all the other American exchanges put together. The value of its listed stocks is also the greatest. The London Stock Exchange lists more stocks, and the Tokyo Stock Exchange exceeded all others in trading volume by the late 1980s. The other exchanges in the United States are the American Stock Exchange , the Midwest Stock Exchange , the Pacific Stock Exchange , and the exchanges in Boston, Philadelphia, and Cincinnati. The term OTC is used when the trading of securities does not take place through the stock exchanges. The OTC market is very large and exists in all parts of the United States. The companies whose securities are traded are often smaller, new, or riskier, or they may not meet listing requirements. In addition to stocks, the OTC market handles nearly all trading in government bonds, all municipal bond trading, and most corporate bond trading. There was no sure way to determine the best price for a stock in OTC trading until 1970. In that year the National Association of Securities Dealers introduced an automated quotation system that used computers to link OTC dealers in markets around the country. Called NASDAQ, the system has made OTC trading more visible to the public. Options trading was standardized in 1973 by the formation of the Chicago Board Options Exchange and became quite similar to dealing in commodity futures . This market is only for the well-informed investor who knows how to speculate and who is able to bear losses in a very risky type of investment. An even more intricate feature was added to the market in 1982—trading in stock index futures. This type of options trading is a highly speculative transaction in which investors sell or buy futures as a hedge against the way they believe the market will go—up or down.
is one of the more complicated aspects of the stock market. Options are contractual agreements between buyers and sellers that confer the right either to buy or to sell 100 shares of stock at a fixed price at a specific time. Securities are traded in two kinds of markets: primary and secondary. When a corporation decides to issue stock to the public, it is undertaking a primary distribution. This first sale of stock is in the primary market, and the money received goes to the company. Newspapers carry daily reports of market activity. These reports give information on the previous day’s trading for each stock and bond on all the exchanges and on the OTC, or Nasdaq, market. the actual pieces of paper that represent ownership, are disappearing from the market in some places. The Tokyo Stock Exchange has nearly eliminated them, relying instead upon computer entries. The United States Department of the Treasury no longer prints or issues Treasury bills or bond certificates. The persistence of stock certificates in the United States is mostly due to the public’s fondness for them. Not all stocks trade on the exchanges. To be traded on the NYSE, a stock must be listed. This is the procedure by which a stock qualifies for trading. Only the most reliable corporate stocks are listed in the NYSE—securities offered by IBM, General Motors, AT&T, and similar companies. is a term for the face value of a stock as stated on the stock certificate. Par value thus represents the assets behind each share at the time of issue. Par value has a direct relation to the assets or to the market value of the shares themselves. Some companies issue stock with no stated value, called no-par stock. It may be sold at any price, whereas par-value stock cannot initially be sold for less than its stated value. is issued by all corporations. It represents more effective ownership and control because it is, with some exceptions, the voting stock. Holders of common stock have the right to choose company directors. Each share of common stock affords its holder one vote. On occasion, companies will issue classified stock. One class will permit voting rights and will probably be retained by the company directors and management. The stock classified as nonvoting will be sold to the general public. The New York Stock Exchange does not list a company’s nonvoting common stock, but some exchanges do. As a guide to stock market trends, various organizations compile market averages. The most widely known is the Dow Jones industrial average, compiled by Dow Jones & Company, the publisher of the Wall Street Journal . Standard & Poor’s Corporation and the New York and American exchanges list market averages constructed on a broader base than the Dow. The terms bull and bear are used to describe upward and downward market trends. We’ve been busy, working hard to bring you new features and an updated design. We hope you and your family enjoy the NEW Britannica Kids. Take a minute to check out all the enhancements! A primary issuance of stock by a corporation is done through an investment banker. Investment bankers—companies such as Merrill Lynch, Morgan Stanley, or Salomon Brothers—have the expertise to know the right time and the proper terms under which an offering can be made. The banker underwrites the issue. Underwriting means that the banker gives the corporation a guarantee of success in selling the stocks or bonds and also agrees to retain any that are not sold. If the issue is quite large, several investment bankers may form a syndicate and divide the offering between themselves. Dividends on preferred stock generally are fixed and cumulative. They do not increase if the company prospers. They may, however, be reduced or suspended if earnings are poor. If they are reduced or suspended, they cumulate and are paid when earnings improve. Most corporations arrange for preferred shareholders to get voting rights if dividends on preferred stocks are suspended for a specified period. stock market stock market articles for studentsstock market stock market articles for students Owners of stocks are continually in the business of trying to better their fortunes by selling and buying stock in the secondary market. A stock increases or decreases in value for a variety of reasons: the general business climate, the type of industry represented by the stock, the success of the issuing company, and more. Those who trade in the secondary market are basically speculators—they are betting that the stock they buy will increase in value and that the stock they sell will decline or level off. Shortly after the crash of 1987, the economic journalist William R. Neikirk stated: “It is not too strong to call our financial markets casinos.” When stocks are traded in the secondary market, none of the money goes to the company that originally issued it. It goes to the seller, minus a commission for the broker. Ownership, or equity interest, in a corporation is represented for most investors by two types of stock: common and preferred. Of the two, common stock represents the primary active ownership in a company but may have less claim to earnings on profits than does preferred stock. Different types of bonds may be categorized according to the use to which the money will be put. Mortgage bonds, for example, are backed by the property of the corporation. Equipment trust certificates are used by railroads and airlines to purchase rolling stock and airplanes. On the NYSE floor are specialists in each stock. Among their functions are the buying or selling of stock when there are no other offers. This helps stabilize the market so it will not be subject to great fluctuations. Certificates for very short-term loans are called commercial paper. The loan period ranges from as little as one day to as long as 270 days. Such notes are issued by financial as well as by industrial corporations. Round lots for commercial paper are usually 1 million dollars or more, though smaller units called odd lots are sometimes available. To protect investors from abuses in the wake of the 1929 crash, the United States Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. The Securities and Exchange Commission , created by the 1934 act, oversees all market activities and regulates the exchanges, investment bankers, brokers, and the OTC market. It also tries to prevent such offenses as misrepresentation, manipulation, and insider trading. In 1970 Congress created the Security Investors Protection Corporation to protect customer accounts, much as the Federal Deposit Insurance Corporation protects bank accounts. The disadvantage of common stock is its minimal claim on company earnings. Dividends on preferred stock must be paid first. In case of company failure, holders of bonds and preferred stock have first claim on assets. If everyone who bought stock simply kept it and waited to collect dividends, there would be no secondary market. The main reason for buying stock, however, is speculation—the hope that the value of the stock will increase so it can be sold at a profit. A secondary market—by far the larger of the two markets—comes into existence because a share of stock, once it has been sold by a corporation, takes on a life of its own. It becomes a piece of property in itself. Like a work of art or a hoard of gold, a share of stock is regarded as something with a potential for increased value. A bond can be thought of as basically a loan agreement. It is a certificate showing that the bondholder has lent a specific amount of money to a corporation or to a government agency and expects to be repaid with interest at some specified date. Interest is usually paid periodically. Bonds confer no rights of ownership, but they do carry a legally enforceable promise to repay. Bonds have different maturity rates. Short-term bonds mature in from one to five years, intermediate bonds in from five to ten years, and most long-term bonds in from 15 to 20 years. Long-term bonds are not necessarily held to maturity. It is to the advantage of the issuing company to redeem them early. Thus many bonds have a call feature: stock market articles for students the corporation has the right to call them in and pay a premium over the price at which the bonds are currently selling. Investors buy listed stocks through brokers, who are officially known as registered representatives. To buy a stock, an investor must have an account with a broker. The broker calls a member of his firm who has a seat on the NYSE. The floor broker at the NYSE goes to the counter at which the stock is traded. Stocks are bought and sold by a process of auction bidding. Buyers and sellers, represented by floor brokers, compete for the best price. Once an agreement to buy or sell has been reached between the floor broker and the trader, the news is relayed back to the brokerage firm and then to the customer. Much stock buying is done on margin—the buyer only has to pay a portion of the stock price at purchase time. The margin requirements vary, but they have generally been about 50 percent. If a buyer has overloaded his account with margin purchases and the market falls, he is required to deposit additional money or face being forced out of his position. This is called margin maintenance. It is the inability to deposit additional funds that causes the great investor losses during a market collapse, because buying on margin is essentially obtaining a loan from the broker—who in turn borrows from a bank. The loan must be repaid, even at the risk of personal bankruptcy. Some preferred stocks are convertible into common stocks. The right to convert is an option for investors who prefer to receive a fairly certain income rather than exercise the rights of ownership. There are some types of bonds that are also classified as convertible securities. To share with more than one person, separate addresses with a comma Most bonds used to be issued in bearer form—the owner was considered to be whoever possessed the certificates. The certificates could be passed from one person to another. Most bonds now are fully registered: the owner’s name is on the certificate, and when it is sold it must be sent to the issuer for a transfer of title. With bearer bonds the interest is claimed by clipping off attached coupons and presenting them for payment to an agent of the issuing corporation or government agency. Because bearer bonds proved difficult to trace when they were lost or stolen, the federal government has forbidden further issuance of them, but there are many outstanding bearer bonds that will not be fully redeemed until well into the 21st century. Registered bonds are more secure. They do not have interest coupons. The interest payments are made by check to the registered bearer. Governments and corporations need money in order to operate. Governments get money in two ways: through taxation and through borrowing. When governments borrow, they issue bonds, or certificates of debt. These certificates pay interest to the people or institutions that buy them. Thus, a person who buys a bond expects, over a specific period of time, to recover the principal—the amount of the loan—plus the interest—the fee the government pays the lender for the use of the money. Corporations likewise have two means of raising money . They may borrow it, and in doing so they may also issue certificates of debt. These certificates are called debentures, or, more commonly, bonds. Like government bonds, they pay interest to the buyers. Just as governments must weigh the merits of higher taxes versus the merits of borrowing, so corporations must decide whether to raise money by borrowing or by issuing stocks. There is a greater risk in borrowing because the company puts itself in debt to someone else. If the debt cannot be repaid, bankruptcy may result. By borrowing, however, management has more control over the operations of the company, whereas when a corporation offers stock to the public, a degree of control is lost. Management becomes responsible to the ownership—those who hold the stock. Stock issues also decrease company income because dividends must be paid out to stockholders from company profits. New companies are quite likely to issue stock, since they are seeking venture capital, or start-up money. Holders of common stock are entitled to receive company earnings reports, and they may attend annual meetings and vote on company policies. Stockholders who do not go to meetings often vote by proxy. This means that they delegate in writing their authority to vote their shares of common stock. Most bonds are offered in 1,000-dollar denominations. Others, called baby bonds, come in 500- or 100-dollar denominations. Bonds are not sold singly, however, but in round lots—usually of 100,000 dollars. Consequently, the small investor is not the usual bond buyer. Most bonds are purchased by institutional investors—insurance companies, foundations, colleges and universities, and pension funds. When a market crashes, the fall occurs in the values of stocks traded in the secondary market. The values of company assets remain the same. In a secondary market a stock value may react to many factors that are completely unconnected to the company that issued the stock. The company itself may be perfectly healthy even as its stock decreases in worth. A few days after the crash of 1987, the journalist James J. Kilpatrick told his readers: “Those of us who know nothing about the stock market will never understand it. That puts us right in the same class with economists and brokers who know all about the stock market.” He was not exaggerating. The stock market—or, more broadly, the securities industry—is far more complex than the markets for products and services. The stock market has been called the paper economy because it deals in money, certificates of ownership, and certificates of debt. The business of the market is the buying and selling of both types of certificates, normally called stocks and bonds. What complicates the market are all the devices that have been introduced into what was originally a simple business transaction. This article deals only with the most general features of the market. After translating an article, all tools except font up/font down will be disabled. To re-enable the tools or to convert back to English, click "view original" on the Google Translate toolbar. The second way for companies to raise money is to issue stocks, which represent ownership in a corporation. A company is literally selling part of itself to raise money. Bonds and stocks are together called securities. The term stock market, though somewhat imprecise, is used to name the industry in which stocks and bonds are bought and sold. Bateman, K.R. The Young Investor . Caes, C.J. The Young Zillionaire’s Guide to the Stock Market . Condon, Daniel. Playing the Market: Stocks and Bonds . Dalton, J.M. How the Stock Market Works , 3rd ed. . Hardeman, S.V. Stock Market Knowledge for All Ages: Answering Questions about Stocks, Bonds, and Mutual Funds . Little, J.B., and Rhodes, Lucien. Understanding Wall Street , 4th ed. . McGowan, E.N., and Dumas, N.L. Stock Market Smart . Morris, K.M., and Morris, V.B. The Wall Street Journal Guide to Understanding Money and Investing , 4th ed. . Scott, D.L. How Stocks Work . Teweles, R.J., and Bradley, E.S. The Stock Market , 7th ed. . Wyss, B.O. Fundamentals of the Stock Market . The many mergers and acquisitions that have taken place since the early 1960s have brought the term junk bonds into prominence. These are loan certificates, issued by corporations, that are of less than investment-grade standards. The risk in owning them is balanced against their higher yields. The money that a company gets from selling junk bonds is normally used to retire the debt incurred in an acquisition. Improved technology and regulatory reforms implemented after the 1987 crash helped prevent a subsequent crash on Oct. 13, 1989, when the Dow Jones industrial average experienced its biggest plunge since 1987. New computer systems were better able to handle the unprecedented volume of trading, and “circuit breakers” in the systems caused trading to be halted for up to an hour when prices dropped to a certain level. Also in the late 1980s the problem of insider trading became a highly publicized issue when the SEC brought charges against some of the most successful members of the business, including the firm of Drexel Burnham Lambert, for this practice. The secondary market for securities is much larger than the primary market. The institutions that handle secondary trading are the stock exchanges, what are the us stock markets doing today