Unit V the stock market
LEARNING OBJECTIVES
After studying this unit, you should be able to:
examine captions, topics and subtopics and predict content related to the functioning of the stock market and its instruments;
apply reading skills to comprehend, analyze, and interpret texts related to the organization and functions of the stock market, classification and characteristics of shares, the peculiarities of trading at the stock exchange (i.e. recognize main ideas in paragraphs, definitions, explanations, examples, classifications, comparisons and contrasts, sequence of events, cause/effect, pros and cons);
use strategies to reinforce comprehension skills (i.e. use graphic organizers to visualize connections between main ideas and supporting details, cite evidence for main ideas, answer literal and critical comprehension questions);
identify the main ideas, recall important details of a listening segment pertaining to the stock market, take notes from spoken context as well as relate new information to previously acquired concepts;
give spontaneous and prepared monologs, dialogs, and group interaction using topical vocabulary;
summarize, annotate, render and translate texts related to the issues covered in the unit.
Exercise 1. Comment on the following quotations. What do the authors mean? Do you agree with them?
“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” (Mark Twain)
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.” (Warren Buffet)
Exercise 2. Look at the following captions. What are these articles about? Comment on the following news.
Exercise 3. Read the text.
Background: Stocks and Shares
Stock markets perform a vital role in today’s world financial markets as a platform on which to trade shares (Br. E.) or stocks (Am. E.) in companies, and also as a place for companies to raise new capital.
Successful companies can issue shares or stocks, which are certificates representing part ownership of a company, to raise capital to expand their operations. If these shares are offered for sale to financial institutions and the general public, this operation is called going public, and the business will change from a private company to a public company (called PLC in Britain and a corporation in the US).
Offering shares to outside investors is generally called a flotation in Britain, and an IPO or initial public offering in the US. Companies usually get advice from an investment bank about how many shares to offer and at what price. The investment bank or other financial institution helps to find buyers, and will probably underwrite the share issue, meaning that it guarantees to buy the shares if there are not enough other buyers.
The company will commission a due diligence report – a detailed examination of its financial situation – from an auditing firm, and then issue a prospectus explaining its position, and giving details about the senior managers and the financial results from previous years.
Shares are also known as equity or equities. Investors called shareholders or stockholders buy stocks and shares in order to receive an income in the form of annual dividends (a share of the company’s profits), or because they hope to make a capital gain by selling the shares at a profit. The most common form of equities is called ordinary shares in Britain and common stock in the US. (In Britain stock means securities such as government bonds.). The ordinary shareholders bear the largest part of the risk, but the гeturns сan be muсh higher than with other forms of investment. Ordinary shareholders are entitled to one vote per share, whiсh gives thеm more say in the running of the сompany; but the amount of dividend they reсeive (if any) is determinеd by the сompany depending on how muсh profit has been made. Less common type of equities is preferred stock (Am. E.) or preference shares (Br. E.) These shares have a fixed dividend whiсh must be paid before the ordinary shareholders сan reсeivе their dividend, whiсh guarantees a return on investment as long as the company is making a profit. Unlike the ordinary shareholder, the preferenсe shareholder is not еntitled to vote in сompanу matters. Cumulative preference shares are a speсial сlass of preferenсe share whiсh offers a safer return on investment. This is beсause if thе сompany сannot pay the dividend one уear, the outstanding amount is сarried over to the following years. Convertible preference shares are another type of preferenсe share whiсh pays a fixed rate of interest until a сertain time. After this time, it is сonverted into an ordinary share on whiсh the holder reсeives a dividend rather than interest.
After an initial flotation, companies that require further capital can issue new shares. This is often in the form of a rights issue: existing shareholders are offered the first right to buy them. After shares have been sold the first time (on the primary market) they can be repeatedly traded at the stock exchange on which the company is listed or quoted, on the secondary market. The major stock exchanges, such as New York and London, require listed companies to publish a lot of financial information for shareholders. The majority of companies use smaller over-the-counter (OTC) markets, such as NASDAQ in New York and the Alternative Investment Market (AIM) in London, which have fewer regulations.
The nominal value of a share is rarely the same as its market price. This can change constantly during trading hours, because it depends on supply and demand. Some stock exchanges have computerized automatic trading that matches up buyers and sellers. Other markets have market makers: traders in shares who quote bid (buying) and offer (ask/selling) prices. The spread or difference between these prices is their profit or mark-up. Most customers place their buying and selling orders with a stockbroker, who trades with the market makers.
Shareholders’ buying and selling decisions depend on the financial situation of the industry in which the company operates, and the state of the economy in general, but also on the benefits of investors – whether they think the price will rise or fall, and whether they think other investors will think this too. Although some investors keep shares for a long period, there are also speculators who buy and sell shares rapidly, hoping to make a profit. These include day traders – people who buy shares and sell them again before the settlement day: the day on which they have to pay for the shares they have purchased, usually three business days after the trade. If day traders sell at a profit before the settlement day, they never have to pay for their shares. Day traders usually work with online brokers on the Internet, who charge low buying or selling commission.
Companies that make a profit are not obliged to pay a dividend to their shareholders: they can also retain their earnings by keeping the profits in the company, which causes the value of the shares to rise. Alternatively, companies can also choose to capitalize part of their earnings, which means turning their profits into capital by issuing new shares to their shareholders rather than paying them a dividend. There are various names for this process, including scrip issue, capitalization issue and bonus issue. Companies with surplus cash can also choose to buy back some of their shares on the secondary market. These are then called own shares in Britain and treasury stock in the US.
Stock markets are measured by stock indexes (or indices), such as the Dow Jones Industrial Average (DJIA) in New York, and the FTSE 100 index (often called the Footsie) in London. These indexes show changes in the average prices of a selected group of important shares.
Investors and financial journalists tend to classify shares in different categories. Blue chips are shares in large companies with a reputation for quality, reliability and profitability. More than two-thirds of all blue-chip shares in industrialized countries are owned by institutional investors such as insurance companies and pension funds. Growth shares are those that are expected to regularly rise in value. Income shares are those that have a history of paying consistently high dividends. Defensive shares provide a regular dividend and stable earnings, but their value is not expected to rise or fall very much. Value shares are those that investors believe are currently trading for less than they should be worth, when compared with the companies’ assets. Financial journalists commonly call investors who buy shares expecting prices to rise bulls, and investors who sell shares expecting them to fall bears. Consequently a period when most of shares on a market rise is a bull market, and one in which most of them fall in value is a bear market. Stags buy newly issued shares in the expectation that priсes will rise, then sell them on in the hope of making a quick profit.