An Overview of the Stock Market

Stocks are shares of ownership in a corporation. They give the stockholder the ability to have on vote in a corporation's decisions, and technically, a small percent of ownership in a corporation. The percent of ownership that one stock holds varies from corporation to corporation. Some corporation s issue very few shares of stock, giving the owner a larger ownership percentage per share. Other large corporations issue hundreds of millions of stocks, therefore limiting the amount of ownership that an investor has per share. Some shares can be more enticing to investors because their corporation will pay a dividend.

A dividend is a taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. They are usually given as cash, called a cash dividend, or stock, called a stock dividend. Dividends give an investor a reason to own a slow moving company because they know that they will still be paid on the quarter. Companies are not required to pay dividends. Dividends are also called payouts.

The market capitalization of a corporation is what the company is really worth on paper. It is the sum of a corporation's long term debt, stock, and retained earnings. Basically, it is the market price of a company, which you can calculate by multiplying the number of outstanding shares a company has by the current price of the share. It is interesting to note that this is much different than a company's book value. Book value is the common stock equity that is recorded on a financial balance sheet. It is equal to total assets minus liabilities, intangible assets and preferred stock. A company's market capitalization can be worth much more than the company's actual book value, because investors expect the company to grow, so they invest for the future.

So where do you go to trade stocks? The "supermarket of stocks" is the New York Stock Exchange (NYSE) located on Wall Street in New York City, and is also called the Big Board. This exchange is the largest, and was started in 1792 officially. It is one of the few exchanges in the world that still uses a trading floor to receive transactions. On this trading floor, representatives of buyers and sellers, professionals known as brokers, meet and shout out prices at each other in order to strike a deal. This is called the open outcry system and it is how fair market pricing is made. The NYSE is the hardest exchange to get a stock listed on. It has a very tough requirement system and even if a corporation meets those requirements, it is not guaranteed a spot on their exchange. The exchange is open Monday through Friday and is known for starting with the ringing of a bell.

The second largest stock exchange in the U.S. is the AMEX, or American Stock Exchange. It is also called "The Curb," because it was started when brokers began trading non-NYSE stocks on the curb outside of the NYSE after hours. The listing rules on AMEX are not as specific as the NYSE and therefore it has more listings. In 1998, AMEX was purchased by NASDAQ to combine their markets, but they have continued to act separately.

Another way to attain stocks is the NASDAQ. NASDAQ is a computerized system that was made by the National Association of Securities Dealers (NASD). NASDAQ has no trading floor like the NYSE or AMEX, and all of its trading is done by computers or telephones. NASDAQ began in the 1970's when brokers were trading by phone, and eventually evolved into the system that is in place now. It has become a major player because of the computer investing company craze, such as E*Trade.

The middleman between a buyer and a seller of stocks is called a broker. They generally charge a percentage based commission per trade, and take care of the dirty work. Brokers are required to be licensed. The Series 6 is a test that registers an individual to transact a limited set of securities. To be more specific, a Series 6 registered individual cannot deal with corporate securities, municipal securities, direct participation programs, or option products. A General Securities Registered Representative License is required to sell all types of securities, and is typically called a Series 7 License. To get the Series 7, a broker must pass the General Securities Representative Examination. Some states require a Series 63, The Uniform Securities Agent State Law License, to be a stockbroker. Another popular license is the commodities futures license, called the Series 3. These major licenses will make a broker able to deal with just about anything.

Who issues stocks? Corporations issue stocks. A corporation is a company that has many legal rights that make it separate from its owners. Its owners are under what is called limited liability. This means that they cannot be held responsible if their company is sued. These are called "C Corporations," which distinguish them from partnerships because the owners of a partnership are liable for their company's debt. An "S Corporation" is a corporation with 75 or fewer shareholders that are under a tax plan of a partnership, but still have the limited liability of a corporation. A "Closed Corporation" is a where there are only a few voting shareholders, such as a family run organization. An aggregate corporation is a simple term for a corporation with more than one shareholder. Since a corporation has sometimes millions of "owners," they elect a group of individuals to oversee the management of the company. This group of individuals meets several times per year, and is called the Board of Directors.

When a corporation begins to issue stock, it is called "going public." When they do this, they offer IPO stocks. This stands for Initial Public Offerings, and is the first sale of stock by a company to the public. These are extremely valuable is some cases because they are hard to get and usually will skyrocket in value quickly. Companies will sometimes set up a Direct Purchase Plan to issue IPO's. They are then called DPO, or Direct Public Offerings because the company is selling them directly to the investor, rather than going through a broker, which avoids the commission aspect. This also is called "no-load stock."

The most common method of determining a stock's value is called the P/E Ratio, or Price to Earnings ratio. This is determined in a quite technical way. Taking the market capitalization and dividing it by the after-tax earnings of a company, usually in twelve-month periods, determine the P/E Ratio. It is the same whether you use the entire company or just a single share. The higher the ratio means the more that the market is willing to pay per dollar of earnings. If a company is not profitable, it has no P/E Ratio at all.

The obvious other method of determining a stock's value is its popularity, or in simple terms, supply and demand. If more people want a stock because they think it will move in the future, the stock price goes up. If more people are willing to sell the stock, making it easier to attain, the price goes down. These investors are usually part of the short-term market investors. They are sometimes day traders, and are in for the quickest buck.

Day traders are a growing breed of investors. The internet has increased the popularity of this type of investing. These are investors who are in the market to make quick sells. They buy a stock and trade it very quickly, and sometimes make a career out of it. They wait to see a small gain, and sell quickly, sometimes in the same day or hour. A day trader makes multiple trades per day, but that can be a downfall. They need to make substantial gains to offset the commission costs associated with the trades.

The primary federal regulatory agency for the securities industry is the SEC, or the Securities and Exchange Commission. The main acts enforced by the SEC are the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act. Their main job is to protect investors from fraudulent behavior. It has five commissioners, each appointed to a five year term with one commissioner changing every year. The SEC is made up of four divisions: The Division of Market Regulation, The Division of Corporate Finance, The Division of Investment Management, and The Division of Enforcement.

A way of determining the success of a market is by averages. This is a group of stocks designed specifically to represent the overall market. The most popular is the Dow Jones Industrial Average. Started by Charles Dow in 1896, the DJIA is now comprised of 30 stocks that are chosen by editors of the Wall Street Journal. Investors keep close watch on the Dow Jones to see the stability of the market. A rising Dow spurs a lot of investment, while a falling Dow starts a landslide. Other indicators of the market conditions are the S&P 500 index and the Russell 2000.

We often hear the good and the bad of the market. In broker terms, these are called Bull and Bear markets. A bull market is great. This is where stocks are higher than their historical value, and usually is a long period of time. The last major bull market was in the 1990's. A bear market is the opposite. Bear markets are where investment prices fall, and people are less inclined to put their money into stocks or funds. We recently had a bear market with the September 11 tragedy. Some analysts say we are still in one, while many argue that we are in the beginning of a bull.Overall, the stock market is a confusing place if you don't know what you are doing. Brokers are there for that reason, and they will generally point an investor in the right direction. The market has caused some people to have wealth of unimaginable proportions, while in has crushed many others like the Stock Market Crash of 1927. It is a game to some, and a career for many, but overall it is like a casino. There are winners...and there are losers. It all depends where the luck falls.