sold or liquidates, the preferred stockholders have a claim on a certain
portion of the assets ahead of the common stockholders. But while a bond is
scheduled to be redeemed by the corporation on a certain "maturity" date, a
preferred stock is ordinarily a permanent part of the corporation's capital
structure. In exchange for receiving an assured dividend, the preferred
stockholder generally does not share in the progress of the company; the
preferred stock is only entitled to the fixed dividend and no more (except
in a small minority of cases where the preferred stock is "participating"
and receives higher dividends on some basis as the company's earnings
grow).
Many preferred stocks are listed for trading on the NYSE and other
exchanges, but they are usually not priced very attractively for individual
buyers. The reason is that for corporations desiring to invest for fixed
income, preferred stocks carry a tax advantage over bonds. As a result,
such corporations generally bid the prices of preferred stocks up above the
price that would have to be paid for a bond providing the same income. For
the individual buyer, a bond may often be a better buy.
4.1 Bonds-Corporate
Unlike a stock, a bond is evidence not of ownership, but of a loan to a
company (or to a government, or to some other organization). It is a debt
obligation. When you buy a corporate bond, you have bought a portion of a
large loan, and your rights are those of a lender. You are entitled to
interest payments at a specified rate, and to repayment of the full "face
amount" of the bond on a specified date. The fixed interest payments are
usually made semiannually. The quality of a corporate bond depends on the
financial strength of the issuing corporation.
Bonds are usually issued in units of $1,000 or $5,000, but bond prices
are quoted on the basis of 100 as "par" value. A bond price of 96 means
that a bond of $1,000 face value is actually selling at $960 And so on.
Many corporate bonds are traded on the NYSE, and newspapers carry a
separate daily table showing bond trading. The major trading in corporate
bonds, however, takes place in large blocks of $100,000 or more traded off
the Exchange by brokers and dealers acting for their own account or for
institutions.
4.2 Bonds-U. S. Government
U.S. Treasury bonds (long-term), notes (intermediate-term) and bills
(short-term), as well as obligations of the various U. S. government
agencies, are traded away from the exchanges in a vast professional 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
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