CHAPTER 12, SECTION 3:

Investing in Equities, Futures and Options

Equities

• Equities are stocks that represent ownership shares in a corporationThe market for equities are competitive because

of the large numbers of investors and the amount of good information available

Market Efficiency

• Many things influence the price of equities• Some companies have relatively few shares to

sell, while others have a large number.• Some companies are profitable, others are not• Expectations are important - - two companies

may be almost exactly equal, but one will have better prospects for growth

• As a result,stock prices can vary significantly from one company to another

• The dilemma for the investor then is which stock to

• buy and which one to avoid. ** THE EFFICICENT MARKET HYPOTHESIS**This states that stocks are always prived about right

and that bargains are hard to find, given the amount of analysis done on them done at the same time, and therefore market fluctuations are quickly adjusted

• Because your chances are strong that your stocks could go down, you need to spread your risk—

• This is done through Portfolio Diversification: The practice of holding a large number of

different stocks so that declines in some will be offset by gains in others

Different ways to buy equities

• Individuals can buy them on line by opening an account through a discount brokerage firm

- - the individual then manages the account through their own PC

One can also pay for the services and expertise of a stockbroker – aperson who buys or sells equities for clients

The broker arranges to buy stocks at a stock exchange or provides securities from an inventory or other broker

Organized Stock Exchanges

• A number of securities exchanges exist – places where buyers and selers meet to trade

securitiesAn organized exchange gets itsd name from the

way it conducts businessMembers pay a fee to join and trades can onlt

take place on the floor of the exchange

The New York Stock Exchange• (NYSE)-This is the oldest, largest, and most

prestigious of the stock exchanges• Has certain rules for both its members and the

corporations listed on the exchange• It has about 1,400 seats or memberships that

allow access to the trading floor and many large corporations a number of seats

• Members may pay several millions of dollars for a seat and can elect their own directors and

vote on rules and regulations of the exchange

• The NYSE LISTS STOCKS FROM ABOUT 2,800 COMPANIES

• They must meet requirements for profitability and size which assures that these companies

will be the largest most profitable publicly held companies

The American Stock Exchange

• Also prestigious(AMEX) is loctaedin New York City

• It has approximately 750 listed stocks• These companies tend to be smaller and more

speculative than those on the NYSE

Global Stock Exchanges

• These are located throughout the world - -• Tokyo, Hong Kong, King Kong, Ding Dong ,Bing

Bong, Bongo Bongo, Bombay,Gomboo,Yoo Hoo, Okay, Do-Say,Yazoo, Boo Hoo, Bally Hoo

Bali Hai, Mai Tai

Measures of Stock Performance

• The Dow Jones Industrial Average - - • This is the most popular and widely publicized

measure of stock market performance • It represents a sample of 30 constant stocks,

though sometimes the stocks can change• No longer figured on a point-worth adollar

• Standard and Poor's 500(S&p 500)It uses the price changes of 500 representative

stocks as an indicator of overall market performance

Because the sum of 500 stocks would be very large, it is reduced to an index number

The S&P reports on stocks listed on theNYSE,AMEX and OTC (over the counter)markets