B) Options and Short Selling

Not all stock market speculation takes the form of buying and selling stocks whose prices are likely to change. Options and short selling allow a speculator to profit from movements in a stock's price without holding the stock itself.

An option is a security that gives its holder the right, but not the obligation, to buy or sell an asset at a set price during a specified time period. Options are classifed as either call or put options. A "call" is an option to buy a particular asset whereas a "put" is an option to sell it. Examples of options include calls and puts on common stock, warrants, and convertible securities.

An investor anticipating a rise in a share can buy a "call" option which, for a specified period, gives him the right to buy this share at an agreed price. If he expects a fall he will buy a "put" option which entitles him to sell. A premium called "option money" is payable for the privilege. If the rise (or fall) in the share is greater than the premium, he will exercise his option and make a profit; if not, he will let the option lapse. In either case his risk is limited to the premium. In a "bull" market most options will be for the "call", in a "bear" market most will be for the "put".

Short selling is a third way to profit from an expected drop in the price of a stock. A short sale is a sale of borrowed shares.

Words you may need:

option n опцион

short selling «короткая продажа»

warrant n варрант

convertible security конвертируемая ценная бумага

anticipate v ожидать, предвидеть

option money опционная премия

to exercise an option исполнить опцион

lapse v (зд.) терять силу

d) Explain what can help shareholders make decisions about selling or buying shares:

c) Events on the Stock Market raise a lot of questions for anyone holding or thinking of buying shares: "Is it all just a gamble?" "Is this a good time to buy?" "What experts can we turn to for reliable advice about when and what shares to buy?" More and more people nowadays ask the question: "How is the Market?"

Normally, the results of trading on any stock market are widely reported. The financial sections of newspapers around the world carry the complete results of each day's trading. In the US, on each business day the Wall Street Journal containts price quotations. Prices are traditionally calibrated in eighths of a dollar, so:

1/8 = $.125

1/4 = $.25

3/8 = $.375

1/2 = $.50

5/8 = $.625

3/4 = $.75

7/8 = $.875

Changes in quotations can be expressed in per cent and in basis points.

Along with stock price quotations, in the practical world of finance, there are other indications that help to summarize stock market performance, to understand the motion of prices.

There are two types of stock price indications – averages and indices.

The averages are based on small samples of key stocks and comprise the industrial average, transportation average, utilities average and the composite average. The indices draw on a large representative sample of stocks and comprise a set of sectoral, industry and subindustry indices together with a composite equity market index.

There are literally hundreds of stock market indices in use around the world. They differ primarily by the mode of weighting and computation. The bulk of these are weighted by the capitalization of the company's common stock.

In the US the most frequently quoted stock market index is the Dow Jones Industrial Average (DJIA), which is based on the stock prices of thirty large, well-established industrial corporations. Another frequently quoted stock market index in the US is the Standard and Poor's 500 Stock Price Index (S & P 500). It is significantly broader than the DJIA. Many stock market watchers prefer broader averages, in particular, the New York Stock Exchange composite average, which covers all stocks traded on that exchange. In the UK, investors watch the FT-SE 100 Share Index, popularly known as "Footsie". It is an index of 100 leading UK shares listed on the International Stock Exchange and provides a minute by minute picture of how share prices are moving. It started on 3rd January 1984 with the base number of 1,000.

FT index refers to the Financial Times Industrial Ordinary Share Index, also known as the "30 Share Index". This started in 1935 at 100, and is based on the prices of 30 leading industrial and commercial shares. They are chosen to be representative of British industry, rather than of the Exchange. The Institute of Actuaries in London and the Faculty of Actuaries in Edinburgh had compiled a broadly-based Actuaries Investment Index each month since 1929. But the advent of computerization paved the way for the daily computation of a greatly expanded index, known as the FT-Actuaries All-Share (FT-A) Index, from 1962.

Words у аи may need:

gamble n азартная игра

calibrate v (зд.) выражать

basis point базовый пункт

motion n движение

average n индекс курсов ценных бумаг

index n (pl indexes or indices) фондовый синтетический индекс

sample n проба, образец

sectoral adj отраслевой

weighting взвешивание (стат.)

computation и вычисление(я), подсчеты

composite average составной индекс

Financial Times (FT) Actuaries All Share Index (FTА) Фондовый индекс всех акций (публикуется газетой «Файнэншл Таймc», Институтом актуариев в Англии и Факультетом актуариев в Шотландии)

Ex. 13. Read the dialogue, sum up its content and act it out:

Russian Company Breaks Onto the New York Stock Exchange

Correspondent: VimpelCom's appearance on NYSE is an historic event for Russia, as it marks this country's crossing the border to join the world market. This is real evidence that Russia is progressing toward a market economy. Is it a great event for the Exchange, too?

Executive Vice-President: Sure. The New York Stock Exchange has always encouraged the listing of foreign companies. And the first company from the former USSR – which only a few years ago was the antithesis of a free market economy – is a symbol of a new world economy, the economy of the third millennium. It is a great event not only for Russia and our Exchange, but for all free market economies on earth.

Cor.: New York City has two stock exchanges; there are another seven elsewhere in America, and hundreds across the world. Why has NYSE been unquestionably the leading one for such a long time in such a competitive industry as securities? Your answer will be valuable to the organizers of new stock exchanges in Russia.

EVP: The most important part of our name is "New York". This town is a financial capital of the world. But the location of the Exchange is only part of the answer to your question. The Exchange itself was largely responsible for creating the financial leadership of the city. When NYSE was established in 1792, the Federal Government and our central bank were situated in Philadelphia. But during the following decades, New York gradually surpassed Philadelphia as the commercial and financial center of America. The brokers of the New York Stock Exchange helped to bring about that change.

Cor.: Is it possible that Russia's "NYSE" may eventually be located in St. Petersburg or Yekaterinburg rather than Moscow?

EVP: Why not? The most successful exchange will be created by the people who have the best strategic approach and the most flexibility.

Cor.: Resistance to change is part of the human condition, and Wall Street is no different, is it?

EVP: Yes, a good example is the advent of financial futures, which Wall Street initially opposed but Chicago embraced. Today, the synergy between the Chicago derivative markets and the New York Stock Exchange (NYSE) is a significant contributor to the strength of the US financial system. But the most dramatic evidence can be seen from the ending of fixed commissions for brokers in 1975. Average trading volume that year was under 20 million shares per day. Today, the average daily volume is 430 million shares per day.

Cor.: Many believe that the primacy of the New York Stock Exchange is due not only to the accident of its location, but also to an accident of history.

EVP: Yes, undoubtedly. NYSE is an auction/agency market, the most economically efficient for trading stocks because customers can trade with each other directly.

Cor.: Is NYSE involved in politics?

EVP.: In our Statement of Buiness Conduct and Ethics, we have a rule that no funds or assets of the Exchange can be contributed to any political party or organization, or to any candidate for public office. Our business is securities, not politics.

Words you may need:

antithesis n полная противоположность

millennium n тысячелетие

surpass v превосходить

advent n приход, появление

financial futures финансовые фьючерсы

synergy n синергия, бóльшая эффективность в результате слияния

derivative market рынок производных ценных бумаг

primacy n первенство

Ex. 14. Give extensive answers to these discussion questions:

1. What type of market is the stock exchange?

2. What services does the stock exchange render to the investor?

3. Is the stock exchange a highly organized market? Why?

4. Do the dealings on the stock exchange affect the prosperity of a working man?

5. Is the stock market/stock exchange important to industry and the government?

6. What does the broker do? How does he earn his living?

7. What part does the speculator play on the stock exchange?

8. Who would normally deal with the issue of new shares?

9. Is there ever a time when no one is buying and selling?

10. How long does business continue before every deal is settled up?

11. What are the functions of an issuing house?

12. How are securities traded on the OTC?

13. How can you explain numerous exchanges that sprung up in this country?

14. How can you account for internationalization of the stock market?

15. Will Europe have a single European Securities Market?