Over-the-counter stocks

The largest securities market in the world in terms of the number of different stocks and bonds traded is the over-the-counter (OTC) market. OTC is not located in any one place, but is primarily an electronic communications network of stock and bond dealers. These stocks are supervised by the National Association of Securities Dealers, Inc., which has the power to expel companies or dealers determined to be dishonest or insolvent. The over-the-counter market tends to get stocks of smaller companies, and by the 1990s had come to be known as a market where many of the fastest growing "high-technology" stocks could be bought and sold. Again, information about trading activity can be acquired through newspapers, magazines, or electronically. A brokerage house usually handles purchases and sales of these stocks along with those on the major exchanges.

Many persons who do not feel qualified to decide which stocks to purchase, but who nevertheless want to participate in the stock market in hopes of making a profit by doing so, turn to mutual funds. A mutual fund combines funds of its shareholders, which may be in small amounts, and invests large blocks of money in a varied portfolio of stocks, thus reducing the risk, which is another reason why many people prefer this method of investing in stocks.

Another advantage of mutual funds to the customer is that the fund's managers get professional advice from staff analysts. It is possible for a fund to employ such persons because the operation is on a large scale. There are dozens of kinds of mutual funds. Some are designed for income, some for capital appreciation, and others are speculative with the chance for large gains or severe losses. Some deal only with stocks of specific industries, or stocks of foreign companies, or companies whose activities benefit the environment.

Buying stock on margin

Americans buy many things on credit, and stocks are no exception. Investors who qualify can make a stock purchase by paying 50 percent down and getting a loan for the remain­der. This is called buying on a "margin" of 50 percent. The balance is borrowed at interest from the brokerage house and the stock certificates are deposited with the broker as securi­ty. The Federal Reserve Board regulates the minimum margins, the amount that must be paid in cash as a percentage of a purchase. The minimum margins vary, depending on whether there is need to stimulate the market or curb its speculative enthusiasm.

If an investor sells stock held on margin that has appre­ciated, the investor may pocket the profit and pay the broker the amount that was borrowed plus interest and commission. If the stock goes down, the investor is required to pay an additional amount into the account. If the owner cannot produce cash, some of the stock is sold at the investor's loss.

Buying stock on margin gives speculators (traders will­ing to gamble on high-risk situations) the opportunity to extend the scope of their operations. Their available cash will buy many more shares, giving them the opportunity of mak­ing more profit and also the risk of suffering greater losses.

At times the Federal Reserve Board requires a 100-percent margin, meaning that all stock must be paid for in cash. During the 1950s, for example, the margin rate varied from a low of 50 percent to a high of 90 percent. A low rate, of course, stimulates stock buying, while a high rate dis­courages it.

The first concern of most investors is the safety of their purchases. If necessary they will often take lower dividends to avoid great risk. In contrast, speculators hope to see the price of their stocks go up, usually within months, or even days. They are more interested in the future of the stock than in its earning power at the time of purchase. People who believe they can outguess the market try to buy before prices rise and sell before they fall.