Stock market


                         SouthUral State University
                  The Department of Economic and Management

                               Work on subject

                                                  The Student: Velichko O.S.
                                                              Group: E&M-263
                                                    The Tutor: Sergeeva L.M.

                                 Chelyabinsk
                                    1998
                                  Contents
     1. Market place

     2. Trading on the stock exchange floor

     3. Securities. Categories of common stock

        1. Growth stocks

        2. Cyclical stocks

        3. Special situations

     4. Preferred stocks

        1. Bonds-corporate

        2. Bonds-U.S. government

        3. Bonds-municipal

        4. Convertible securities

        5. Option

        6. Rights

        7. Warrants

        8. Commodities and financial futures

     5. Stock market averages reading the newspaper quotations

        1. The price-earnings ratio

     6. European stock markets–general trend

        1. New ways for old

        2. Europe, meet electronics

     7. New issues

     8. Mutual funds. A different approach

        1. Advantages of mutual funds

        2. Load vs. No-load

        3. Common stock funds

        4. Other types of mutual funds

        5. The daily mutual fund prices

        6. Choosing a mutual fund


1. MARKET PLACE

     The stock market. To some it’s a puzzle. To others  it’s  a  source  of
profit and endless fascination. The stock  market  is  the  financial  nerve
center of any country.  It  reflects  any  change  in  the  economy.  It  is
sensitive to interest rates, inflation and political events. In a very  real
sense, it has its fingers on the pulse of the entire world.
     Taken in its broadest sense, the stock market is also a control center.
It is the market place where businesses and governments come to raise  money
so that they can continue and expend their  operations.  It  is  the  market
place where giant businesses and institutions come to make and change  their
financial commitments. The stock  market  is  also  a  place  of  individual
opportunity.
     The phrase “the stock market”  means  many  things.  In  the  narrowest
sense, a stock market is a place where stocks are traded –  that  is  bought
and sold. The phrase “the stock market”  is  often  used  to  refer  to  the
biggest and most important stock market in the world,  the  New  York  Stock
Exchange, which is as well the oldest in the US. It  was  founded  in  1792.
NYSE is located at 11 Wall Street in New York City. It is also known as  the
Big Board and the Exchange. In the  mid-1980s  NYSE-listed  shares  made  up
approximately  60%  of  the  total  shares  traded  on  organized   national
exchanges in the United States.
     AMEX stands for the American Stock Exchange. It has the second  biggest
volume of trading in the  US.  Located  at  86  Trinity  Place  in  downtown
Manhattan, the AMEX was known until 1921 as the Curb  Exchange,  and  it  is
still referred to as the  Curb  today.  Early  traders  gathered  near  Wall
Street. Nothing could stop those outdoor brokers. Even in the snow and  rain
they put up lists of stocks for sale. The gathering place  became  known  as
the outdoor curb market, hence the name the Curb. In 1921 the  Curb  finally
moved indoors. For the most part, the stocks and bonds traded  on  the  AMEX
are those of small to medium-size companies, as  contrasted  with  the  huge
companies whose shares are traded on the New York Stock Exchange.
     The Exchange is non-for-profit corporation run by a board of directors.
Its member firm are subject to a strict and detailed  self-regulatory  code.
Self-regulation is a matter of self-interest for stock exchange members.  It
has built public confidence in the Exchange. It also required  by  law.  The
US  Securities  and  Exchange  Commission  (SEC)  administers  the   federal
securities laws and supervises  all  securities  exchange  in  the  country.
Whenever self-regulation doesn’t do the job, the SEC is likely  to  step  in
directly. The Exchange doesn’t buy, sell or own any securities nor  does  it
set stock prices. The Exchange merely is the market place where the  public,
acting through member brokers, can buy and sell at prices set by supply  and
demand.
     It costs money it become  an  Exchange  member.  There  are  about  650
memberships or “seats” on the NYSE, owned by large and small  firms  and  in
some cases by individuals. These seats can be bought and sold; in  1986  the
price of a seat averaged around $600,000. Before you are permitted to buy  a
seat you must pass a test that strictly scrutinizes your  knowledge  of  the
securities industry as well as a check of experience and character.
     Apart from the NYSE and the AMEX there are also “regional” exchange  in
the US, of which the  best  known  are  the  Pacific,  Midwest,  Boston  and
Philadelphia exchange.
     There is one more market place in which  the  volume  of  common  stock
trading begins to approach that of the NYSE. It is trading of  common  stock
“over-the-counter” or “OTC”–that is not  on  any  organized  exchange.  Most
securities  other  than  common  stocks  are  traded  over-the-counter.  For
example, the vast market in US Government securities is an  over-the-counter
market. So is the money market–the market in which all sorts  of  short-term
debt obligations are traded daily in tremendous  quantities.  Like-wise  the
market for long-and short-term borrowing by  state  and  local  governments.
And the bulk of trading in corporate bonds also  is  accomplished  over-the-
counter.
     While most of the common stocks traded over-the-counter  are  those  of
smaller companies, many sizable corporations continue to  be  found  on  the
“OTC” list, including a large number of banks and insurance companies.
     As there is no physical  trading  floor,  over-the-counter  trading  is
accomplished through vast telephone and other electronic networks that  link
traders as closely as if they were seated in the same room.  With  the  help
of computers, price quotations from dealers in Seattle, San  Diego,  Atlanta
and Philadelphia can be flashed on  a  single  screen.  Dedicated  telephone
lines  link  the  more   active   traders.   Confirmations   are   delivered
electronically rather than through the  mail.  Dealers  thousands  of  miles
apart who are complete strangers execute trades in  the  thousands  or  even
millions of dollars based on thirty seconds of  telephone  conversation  and
the knowledge that each is a securities dealer registered with the  National
Association of  Securities  Dealers  (NASD),  the  industry  self-regulatory
organization that supervises OTC trading. No matter which way market  prices
move subsequently, each knows that the trade will be honoured.

     2. TRADING ON THE STOCK EXCHANGE FLOOR

     When an individual wants to place an order to buy or  sell  shares,  he
contacts a brokerage firm that is a member of  the  Exchange.  A  registered
representative or “RR”  will  take  his  order.  He  or  she  is  a  trained
professional who  has  passed  an  examination  on  many  matters  including
Exchange rules and producers.
     The individual’s order is relayed to a telephone clerk on the floor  of
the Exchange and by the telephone clerk  to  the  floor  broker.  The  floor
broker who  actually  executes  the  order  on  the  trading  floor  has  an
exhausting and high-pressure job. The trading floor is a  larger  than  half
the size of football field. It is  dotted  with  multiple  locations  called
“trading posts”. The floor broker proceeds to the post where  this  or  that
particular stock is traded and finds out which  other  brokers  have  orders
from clients to buy or sell the stock, and at what prices. If the order  the
individual placed is a “market order”–which means an order to  buy  or  sell
without delay at the best price available–the broker  size  up  the  market,
decides whether to bargain for a better  price  or  to  accept  one  of  the
orders being shown, and executes the trade–all this happens in a  matter  of
seconds. Usually shares are traded in round lots on securities exchanges.  A
round lot is generally 100 shares, called a unit of trading,  anything  less
is called an odd lot.
     When you first see the trading floor, you might assume all brokers  are
the  same,  but  they  aren’t.  There  are   five   categories   of   market
professionals active on the trading floor.
     Commission Brokers, usually floor brokers, work for member firms.  They
use their experience, judgment and execution skill to buy and sell  for  the
firm’s customer for a commission.
     Independent Floor Brokers are individual entrepreneurs who  act  for  a
variety of clients. They execute orders for other  floor  brokers  who  have
more volume than they can handle, or for firms whose  exchange  members  are
not on the floor.
     Registered Competitive Market Makers have specific obligations to trade
for their own or their firm’s  accounts–when  called  upon  by  an  Exchange
official–by making a bid or  offer  that  will  narrow  the  existing  quote
spread or improve the depth of an existing quote.
     Competitive Traders trade for their own accounts,  under  strict  rules
designed to assure that their activities contribute to market liquidity.
                                    [pic]
     And last, but not least, come Stock Specialists. The Exchange tries  to
preserve price continuity– which means that if a stock has been trading  at,
say, 35, the next buyer or seller should  be  able  to  an  order  within  a
fraction of that price. But what if a buyer comes in when  no  other  broker
wants to sell close to the last price? Or vice versa for a  seller?  How  is
price continuity  preserved?  At  this  point  enters  the  Specialist.  The
specialist  is  charged  with  a  special  function,  that  of   maintaining
continuity in the price of specific stocks.  The  specialist  does  this  by
standing ready to buy shares  at  a  price  reasonably  close  to  the  last
recorded sale price when someone wants to  sell  and  there  is  a  lack  of
buyers, and to sell when there is a lack of sellers  and  someone  wants  to
buy. For each listed stock, there are one or more specialist firms  assigned
to perform this stabilizing function. The specialist also acts as a  broker,
executing public orders for the stock, and keeping a record of limit  orders
to be executed if the price of the stock reaches a specified level. Some  of
the specialist firms are large and assigned to many  different  stocks.  The
Exchange  and  the  SEC  are  particularly  interested  in  the   specialist
function, and trading by the specialists is closely monitored to  make  sure
that they are giving precedence to public orders and  helping  to  stabilize
the markets, not merely trying to  make  profits  for  themselves.  Since  a
specialist may at any time be called on to buy and hold substantial  amounts
of stock, the specialist firms must be well capitalized.
     In today's markets, where multi-million-dollar trades  by  institutions
(i. e. banks, pension funds, mutual funds, etc.)  have  become  common,  the
specialist can no longer absorb all of the large  blocks  of  stock  offered
for sale, nor supply the large blocks being sought by institutional  buyers.
Over the last several years, there has been a rapid growth in block  trading
by large brokerage firms and other firms in the securities industry.  If  an
institution wants to sell a large block of stock, these firms  will  conduct
an expert and rapid  search  for  possible  buyers;  if  not  enough  buying
interest is found, the block trading  firm  will  fill  the  gap  by  buying
shares itself, taking the risk of  owning  the  shares  and  being  able  to
dispose of them subsequently at a profit. If the institution  wants  to  buy
rather than sell, the process is reversed.  In  a  sense,  these  firms  are
fulfilling the same function as the specialist, but on a much larger  scale.
They are stepping in to buy and own stock temporarily when offerings  exceed
demand, and vice versa.
     So the specialists and the block traders  perform  similar  stabilizing
functions, though the block traders  have  no  official  role  and  have  no
motive other than to make a profit.

     3. SECURITIES. CATEGORIES OF COMMON STOCK

     There is a lot to be said about securities. Security is  an  instrument
that signifies (1) an ownership position in a corporation (a stock),  (2)  a
creditor relationship with a corporation or governmental body (a  bond),  or
(3) rights to ownership such as those represented by an option,  subsription
right, and subsription warrant.
     People who own stocks and  bonds  are  referred  to  as  investors  or,
respectively, stockholders (shareholders) and bondholders. In other words  a
share of stock is a share of  a  business.  When  you  hold  a  stock  in  a
corporation you are part owner of the corporation. As a proof  of  ownership
you may ask for a certificate with your name and the number  of  shares  you
hold. By law, no one under 21 can buy or sell  stock.  But  minors  can  own
stock if kept in trust for them by an adult. A bond represents a promise  by
the company or government to pay back  a  loan  plus  a  certain  amount  of
interest over a definite period of time.
     We  have  said  that  common  stocks  are  shares   of   ownership   in
corporations. A corporation is a separate legal entity that  is  responsible
for its own debts and obligations. The individual owners of the  corporation
are not liable for the corporation's obligations.  This  concept,  known  as
limited liability, has made possible the growth of  giant  corporations.  It
has allowed millions of stockholders to feel secure  in  their  position  as
corporate owners. All that they have risked is  what  they  paid  for  their
shares.
     A stockholder (owner) of a corporation  has  certain  basic  rights  in
proportion to the number of shares he or she owns.  A  stockholder  has  the
right to vote for the election of directors, who  control  the  company  and
appoint management. If the company makes profits and  the  directors  decide
to pay part of these profits to shareholders  as  dividends,  a  stockholder
has a right to receive his proportionate share. And if  the  corporation  is
sold or liquidates, he has  a  right  to  his  proportionate  share  of  the
proceeds.
     What type of stocks can be found on stock exchanges? The  question  can
be answered in different ways. One way is by industry groupings.  There  are
companies in every industry, from aerospace to wholesale  distributers.  The
oil  and   gas   companies,   telephone   companies,   computer   companies,
autocompanies and electric utilities are  among  the  biggest  groupings  in
terms of total earnings and market value.  Perhaps  a  more  useful  way  to
distinguish stocks is according to the qualities and values investors want.

     3.1 Growth Stocks.

     The phrase "growth stock" is widely used as a  term  to  describe  what
many investors are looking for. People who are willing to take greater-than-
average  risks  often  invest  in  what  is   often   called   "high-growth"
stocks—stocks of  companies  that  are  clearly  growing  much  faster  than
average and where the stock commands a premium  price  in  the  market.  The
rationale is that the company's earnings will continue to grow  rapidly  for
at least a few more years to a level that justifies the  premium  price.  An
investor should keep in mind that only a small minority of companies  really
succeed in making earnings grow  rapidly  and  consistently  over  any  long
period. The potential rewards are high, but the stocks can drop in price  at
incredible rates when earnings don't grow  as  expected.  For  example,  the
companies in the video game industry boomed in  the  early  1980s,  when  it
appeared that the whole world was about to turn into one vast video  arcade.
But when public interest shifted to personal computers, the companies  found
themselves stuck  with  hundreds  of  millions  of  dollars  in  video  game
inventories, and the stock collapsed.
     There is less glamour, but also less risk, in  what  we  will  call—for
lack of a better phrase—"moderate-growth" stocks. Typically, these might  be
stocks that do not sell at premium, but where it appears that the  company's
earnings will grow at a  faster-than-average  rate  for  its  industry.  The
trick, of course, is in forecasting which companies really will show better-
than-average growth; but even if the forecast is wrong, the risk should  not
be great, assuming that the price was fair to begin with.
     There's a broad category of stocks that has no particular name but that
is attractive to many investors, especially those who prefer to stay on  the
conservative side. These are stocks of companies  that  are  not  glamorous,
but that grow in line with the economy. Some examples  are  food  companies,
beverage companies, paper and packaging manufacturers,  retail  stores,  and
many companies in assorted consumer fields.
     As long as the economy is healthy  and  growing,  these  companies  are
perfectly reasonable investments; and at  certain  times  when  everyone  is
interested in "glamour" stocks, these "non-glamour" issues may be  neglected
and available at bargain prices. Their growth  may  not  be  rapid,  but  it
usually is reasonably consistent. Also, since these companies  generally  do
not need to plow all their earnings back into the  business,  they  tend  to
pay sizable dividends to their stockholders. In addition to the real  growth
that these companies achieve, their values should adjust  upward  over  time
in line with inflation—a general advantage of common stocks  that  is  worth
repeating.

     3.2 Cyclical Stocks.

     These are stocks of companies that do not show any clear growth  trend,
but where the stocks fluctuate in line with the business  cycle  (prosperity
and recession) or some other recognizable pattern. Obviously, one  can  make
money if he buys these near the bottom of a price cycle and sells  near  the
top. But the bottoms and tops can be hard to recognize when they occur;  and
sometimes, when you think that a stock is near the bottom  of  a  cycle,  it
may instead be in a process of long-term decline.

     3.3 Special Situations.

     There’s a type of investment that professionals  usually  refer  to  as
“special situations”.  These  are  cases  where  some  particular  corporate
development–perhaps a merger, change of control,  sale  of  property,  etc.–
seems likely to raise the value of a stock.  Special  situation  investments
may be less affected by general stock  market  movements  than  the  average
stock  investment;  but  if  the  expected  development  doesn’t  occur,  an
investor may suffer a loss, sometimes sizable.  Here  the  investor  has  to
judge the odds of the expected development’s actually coming to pass.

     4. PREFERRED STOCKS

     A preferred stock is a stock which bears some resemblances  to  a  bond
(see  below).  A  preferred  stockholder  is  entitled  to  dividends  at  a
specified rate, and these dividends must be paid before  any  dividends  can
be paid on the company's common stock. In most cases the preferred  dividend
is cumulative, which means that if it isn't paid in  a  given  year,  it  is
owed by the company to the preferred  stockholder.  If  the  corporation  is
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 ˝ of 1%. A change of ˝% 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
tables. These tables include complete reports on the previous day’s  trading
on the  NYSE  and  other  leading  exchanges.  They  can  also  give  you  a
surprising amount of extra information.
     Some newspapers provide more extensive tables,  some  less.  Since  the
Wall Street Journal is available world wide, we’ll use it  as  a  source  of
convenient examples. You’ll find a prominent page  headed  “New  York  Stock
Exchange Composite Transactions”. This table covers the  day’s  trading  for
all stocks listed on the NYSE.  “Composite”  means  that  it  also  includes
trades in those same stocks on certain other  exchanges  (Pacific,  Midwest,
etc.) where the stocks are “dually listed”. Here are some sample entries:

|52 Weeks    |        |     |Yld   |P-E  |Sales |     |      |      |Net  |
|High |Low   |Stock   |Div  |%     |Ratio|100s  |High |Low   |Close |Chg. |
|52   |37 5/8|Cons Ed |2.68 |5.4   |12   |909   |49   |48 7/8|49 1/4|+1/4 |
|7/8  |      |        |     |      |     |      |3/8  |      |      |     |
|91   |66 1/2|Gen El  |2.52 |2.8   |17   |11924 |91   |89 5/8|90    |-1   |
|1/8  |      |        |     |      |     |      |3/8  |      |      |     |
|41   |26 1/4|Mobil   |2.20 |5.4   |10   |15713 |41   |40 1/2|40 7/8|+5/8 |
|3/8  |      |        |     |      |     |      |     |      |      |     |


     Some of the  abbreviated  company  names  in  the  listings  can  be  a
considerable puzzle, but you will get used to them.
     While some of the columns contain  longer-term  information  about  the
stocks and the companies, we'll look first  at  the  columns  that  actually
report on the day's trading. Near the center of the table  you  will  see  a
column headed "Sales 100s". Stock trading generally takes place in units  of
100 shares and is tabulated that way; the figures mean,  for  example,  that
90,900 shares of Consolidated Edison, 1,192,400 shares of General  Electric,
and 1,571,300 shares of Mobil traded on January 8. (Mobil actually  was  the
12th "most active" stock on the NYSE that day, meaning that it  ranked  12th
in number of shares traded.)
     The next three columns show the highest price for the day, the  lowest,
and the last or "closing" price. The "Net Chg." (net change) column  to  the
far right shows how the closing  price  differed  from  the  previous  day's
close—in this case, January 7.
     Prices are traditionally calibrated in eighths of a dollar. In case you
aren't familiar with the equivalents, they are:
                                    1/8 =$.125
                                    1/4=$.25
                                    3/8 =$.375
                                    1/2 =$.50
                                    5/8 =$.625
                                    3/4=$.75
                                    7/8 =$.875
     Con Edison traded on January 8 at a high of $49.375 per share and a low
of $48 875, it closed at $49.25, which was a gain  of  $0.25  from  the  day
before. General Electric closed down $1.00 per  share  at  $90  00,  but  it
earned a "u" notation by trading during the day at $91 375, which was a  new
high price for the stock during the most recent 52 weeks (a  new  low  price
would have been denoted by a "d").
     The two columns to the far left show the high and low  prices  recorded
in the latest 52 weeks, not including the latest day. (Note  that  the  high
for General Electric is shown as 91 1/8, not 91 3/8.)  You  will  note  that
while neither Con Edison nor Mobil reached a new high  on  January  8,  each
was near the top of its "price range" for the latest 52  weeks.  (Individual
stock price charts, which  are  published  by  several  financial  services,
would show the price history of each stock in detail.)
     The other three columns in the table give you  information  of  use  in
making judgments about stocks as investments.  Just  to  the  right  of  the
name, the "Div." (dividend) column shows the current  annual  dividend  rate
on the stock — or, if  there's  no  clear  regular  rate,  then  the  actual
dividend total for the latest 12 months. The dividend rates shown  here  are
$2.68 annually for Con Edison, $2.52 for GE,  and  $2.20  for  Mobil.  (Most
companies that pay regular  dividends  pay  them  quarterly:  it's  actually
$0.67 quarterly for Con Edison, etc.) The "Yid." (Yield) column relates  tie
annual dividend to the latest stock price. In the case of  Con  Edison,  for
example,  $2.68  (annual  dividend)/$49.25  (stock  price)   ==5.4%,   which
represents the current yield on the stock.

     5.1 The Price-Earnings Ratio

     Finally, we have  the  "P-E  ratio",  or  price-earnings  ratio,  which
represents a key figure in judging the value of a stock. The  price-earnings
ratio—also referred  to  as  the  "price-earnings  multiple",  or  sometimes
simply as the "multiple"—is the ratio  of  the  price  of  a  stock  to  the
earnings per share behind the stock.
     This concept is  important.  In  simplest  terms  (and  without  taking
possible complicating factors into  account),  "earnings  per  share"  of  a
company are calculated by taking the company's net  profits  for  the  year,
and dividing by the number of shares outstanding. The result is, in  a  very
real sense, what each share earned in the business for the year — not to  be
confused with the dividends that the company may or may not have  paid  out.
The board of directors of the company may decide to plow the  earnings  back
into the business, or to pay them  out  to  shareholders  as  dividends,  or
(more likely) a combination of both; but in any case,  it  is  the  earnings
that are usually considered as the key measure of the company's success  and
the value of the stock.
     The price-earnings ratio tells you a great  deal  about  how  investors
view a stock. Investors will bid a stock price up to a higher multiple if  a
company's earnings are expected to grow rapidly in the future. The  multiple
may look too high in relation to current earnings, but not  in  relation  to
expected future earnings. On the other hand, if  a  company's  future  looks
uninteresting, and earnings are not  expected  to  grow  substantially,  the
market price will decline to a point where the multiple is low.
     Multiples also change with the broad cycles of  the  stock  market,  as
investors become willing  to  pay  more  or  less  for  certain  values  and
potentials. Between 1966 and 1972, a period of enthusiasm  and  speculation,
the average multiple was usually 15 or  higher.  In  the  late  1970s,  when
investors were generally cautious and skeptical, the  average  multiple  was
below  10.   However,   note   that   these   figures   refer   to   average
multiples–whatever the average multiple is at any given time, the  multiples
on individual stocks will range above and below it.
     Now we can return to the table. The P-E ratio for each stock  is  based
on the latest price of the stock and on earnings for the latest reported  12
months. The multiples, as you can see, were 12 for Con Edison,  17  for  GE,
and 10 for Mobil. In January 1987, the average multiple for all  stocks  was
very roughly around 15. Con Edison is viewed by investors  as  a  relatively
good-quality utility company, but one that by the  nature  if  its  business
cannot grow much more rapidly that the economy as a whole. GE, on the  other
hand, is generally given a premium rating as a company that is  expected  to
outpace the economy.
     You can't buy a stock on the P-E ratio alone, but the ratio  tells  you
much that is useful. For stocks where no P-E ratio is shown, it often  means
that the company showed a loss for the latest 12 months,  and  that  no  P-E
ratio can be calculated. Somewhere near the main NYSE table, you'll  find  a
few small tables that also  relate  to  the  day's  NYSE-Composite  trading.
There's the table showing the 15 stocks that traded the greatest  number  of
shares for the day (the "most active" list), a  table  of  the  stocks  that
showed the greatest percentage  of  gains  or  declines  (low-priced  stocks
generally predominate here); and one showing  stocks  that  made  new  price
highs or lows relative to the latest 52 weeks.
     You'll find  a  large  table  of  "American  Stock  Exchange  Composite
Transactions", which does for stocks listed on the AMEX just what the  NYSE-
Composite table does  for  NYSE-listed  stocks.  There  are  smaller  tables
covering the Pacific Stock Exchange, Boston  Exchange,  and  other  regional
exchanges.
     The tables showing over-the-counter stock trading are generally divided
into two or three sections. For the major  over-the-counter  stocks  covered
by the NASDAQ quotation and reporting system, actual sales for the  day  are
reported and tabulated just as for stocks on the NYSE  and  AMEX.  For  less
active over-the-counter stocks, the  paper  lists  only  "bid"  and  "asked"
prices, as reported by dealers to the NASD.
     It is worth becoming familiar with the daily table of  prices  of  U.S.
Treasury and agency securities. The Treasury issues are shown  not  only  in
terms of price, but in terms of the yield represented by the current  price.
This is the simplest way to get a bird's-eye view of  the  current  interest
rate situation—you can see at  a  glance  the  current  rates  on  long-term
Treasury bonds, intermediate-term notes, and short-term bills.
     Elsewhere in the paper you will also find a large table showing  prices
of corporate bonds traded on the NYSE, and a small table  of  selected  tax-
exempt bonds (traded OTC). But unless you have a specific  interest  in  any
of these issues, the table of Treasury prices is the best way to follow  the
bond market.
     There are other tables listed. These are generally for more experienced
investors and those interested in taking higher risks.  For  example,  there
are tables showing the trading on  several  different  exchanges  in  listed
options—primarily options to buy or sell common  stocks  (call  options  and
put options). There are futures prices— commodity futures and also  interest
rate futures, foreign currency futures, and stock index futures.  There  are
also options relating to interest rates and options relating  to  the  stock
index futures.

     6. EUROPEAN STOCKMARKETS–GENERAL TREND

     Competition among Europe’s securities exchanges  is  fierce.  Yet  most
investors  and  companies  would  prefer  fewer,  bigger  markets.  If   the
exchanges do not get together to provide them, electronic usurpers will.
     How many stock exchanges does a Europe with  a  single  capital  market
need? Nobody knows. But a part-answer is clear: fewer  than  it  has  today.
America has eight stock exchanges, and seven futures and options  exchanges.
Of these only the New York Stock  Exchange,  the  American  Stock  Exchange,
NASDAQ (the over-the-counter market), and the two Chicago futures  exchanges
have substantial turnover and nationwide pretensions.
     The 12 member countries of the European Community  (EC),  in  contrast,
boast 32 stock exchanges and 23 futures and  options  exchanges.  Of  these,
the market in London,  Frankfurt,  Paris,  Amsterdam,  Milan  and  Madrid–at
least–aspire to significant roles on the European and world stages. And  the
number of exchanges is growing. Recent arrivals include exchanges  in  Italy
and Spain. In eastern Germany, Leipzig wants to reopen  the  stock  exchange
that was closed in 1945.
     Admittedly, the EC is not as integrated  as  the  United  States.  Most
intermediaries, investors and companies are still national rather than  pan-
European in character. So is  the  job  of  regulating  securities  markets;
there is  no  European  equivalent  of  America’s  Securities  and  Exchange
Commission (SEC). Taxes, company law and accounting practices  vary  widely.
Several regulatory barriers to  cross-border  investment,  for  instance  by
pension funds, remain in place. Recent turmoil  in  Europe’s  exchange  rate
mechanics has reminded cross0border investors about currency  risk.  Despite
the Maastricht treaty, talk of a common currency is little more than that
     Yet the local loyalties that sustain so many  European  exchanges  look
increasingly out-of-date. Countries that once had regional  stock  exchanges
have seen them merged into one.  A  single  European  market  for  financial
services is on its  way.  The  EC's  investment  services  directive,  which
should come into  force  in  1996,  will  permit  cross-border  stockbroking
without the need to  set  up  local  subsidiaries.  Jean-Francois  Theodore,
chairman of the Paris Bourse, says this will lead to  another  European  Big
Bang. And finance is the multinational business par excellence:  electronics
and the end of most capital controls mean that securities traders  roam  not
just Europe but the globe in search of the best returns.
     This affects more than just stock exchanges. Investors  want  financial
market that are cheap, accessible and of high liquidity (the ability to  buy
or sell shares without moving the price). Businesses, large and small,  need
a capital market in which they can raise  finance  at  the  lowest  possible
cost If European exchanges do not meet these requirements, Europe's  economy
suffers.
     In the past few years the favoured way of shaking up bourses  has  been
competition. The event that triggered this was London's Big Bang in  October
1986,  which  opened  its  stock  exchange  to  banks  and  foreigners,  and
introduced a screen-plus-telephone system of  securities  trading  known  as
SEAQ. Within weeks the trading floor had been abandoned. At the time,  other
European bourses saw Big Bang  as  a  British  eccentricity.  Their  markets
matched buy and sell orders (order-driven  trading),  whereas  London  is  a
market  in  which  dealers  quote  firm  prices  for  trades   (quote-driven
trading). Yet many continental markets soon found themselves forced to  copy
London's example.
     That  was  because  Big  Bang  had  strengthened   London's   grip   on
international  equity-trading.  SEAQ's  international  arm  quickly  grabbed
chunks of European business. Today the London  exchange  reckons  to  handle
around 95% of all European cross-border share-trading It  claims  to  handle
three-quarters of the trading in blue-chip shares based in Holland, half  of
those in France and Italy and a quarter of those in Germany—though, as  will
become clear, there is some dispute about these figures.
     London's market-making tradition and the presence of many international
fund managers helped it to win this business. So did  three  other  factors.
One was stamp duties on share deals done  in  their  home  countries,  which
SEAQ usually  avoided.  Another  was  the  shortness  of  trading  hours  on
continental bourses. The third was the ability of SEAQ,  with  market-makers
quoting two-way prices for business in large amounts, to  handle  trades  in
big blocks of stock that can be fed through order-driven markets  only  when
they find counterparts.
     A similar tussle for business has been seen among  the  exchanges  that
trade futures and options. Here, the  market  which  first  trades  a  given
product tends to corner the business in it. The  European  Options  Exchange
(EOE) in Amsterdam was the first derivatives exchange in  Europe;  today  it
is the only one to trade a European  equity-index  option.  London's  LIFFE,
which opened in 1982 and is now Europe's biggest derivatives  exchange,  has
kept a two-to-one lead in German government-bond futures  (its  most  active
contract) over Frankfurt's DTB, which opened only in  1990.  LIFFE  competes
with several other European exchanges, not always successfully: it lost  the
market in ecu-bond futures to Paris's MATIF.
     European exchanges armoured themselves for this battle in  three  ways.
The first was to fend off foreign competition with rules. In three years  of
wrangling over  the  EC's  investment-services  directive,  several  member-
countries pushed for rules that would require securities to be  traded  only
on a recognized exchange. They also demanded rules  for  the  disclosure  of
trades and prices that would  have  hamstrung  SEAQ's  quote-driven  trading
system. They were beaten off in  the  eventual  compromise,  partly  because
governments realized they  risked  driving  business  outside  the  EC.  But
residual attempts to stifle competition remain. Italy passed a law  in  1991
requiring trades in Italian shares to be conducted through a firm  based  in
Italy. Under pressure from the European Commission, it may  have  to  repeal
it.

     6.1 New Ways for Old

     The second response to competition has been frantic efforts by  bourses
to modernize systems,  improve  services  and  cut  costs.  This  has  meant
investing in new trading systems, improving the way deals are  settled,  and
pressing governments to scrap stamp duties. It has also  increasingly  meant
trying to beat London at its own game, for instance by  searching  for  ways
of matching London's prowess in block trading.
     Paris, which galvanized itself in 1988, is a good example.  Its  bourse
is now open to outsiders. It has a  computerized  trading  system  based  on
continuous auctions, and settlement of most of its  deals  is  computerized.
Efforts to set up  a  block-trading  mechanism  continue,  although  slowly.
Meanwhile, MATIF, the French futures exchange, has  become  the  continent's
biggest. It is especially proud of its ecu-bond contract, which should  grow
in importance if and when monetary union looms.
     Frankfurt,  the  continent's  biggest  stock-market,  has  moved   more
ponderously, partly because  Germany's  federal  system  has  kept  regional
stock exchange in being, and left much of the regulation of its  markets  at
Land (state) level. Since January 1st 1993 all German  exchanges  (including
the DTB) have been grouped under a firm called Deutsche  Borse  AG,  chaired
by Rolf Breuer, a member of Deutsche Bank’s board. But there is  still  some
way to  go  in  centralizing  German  share-trading.  German  floor  brokers
continue to resist the inroads made by the bank’s screen-based IBIS  trading
system. A law to set up a federal securities regulator  (and  make  insider-
dealing illegal) still lies becalmed in Bonn.
     Other bourses are moving too. Milan is  pushing  forward  with  screen-
based trading  and  speeding  up  its  settlement.  Spain  and  Belgium  are
reforming  their  stock-markets  and  launching   new   futures   exchanges.
Amsterdam plans an especially determined attack on SEAQ. It is  implementing
a McKinsey report that  recommended  a  screen-based  system  for  wholesale
deals, a special mechanism for big block trades and a  bigger  market-making
role for brokers.
     Ironically, London now finds itself a laggard  in  some  respects.  Its
share settlement remains prehistoric; the computerized project to  modernize
it has just been scrapped. The SEAQ trading system is  falling  apart;  only
recently has the exchange, belatedly,  approves  plans  draw  up  by  Arthur
Andersen for a replacement, and there is plenty of skepticism  in  the  City
about its ability to deliver. Yet the exchange’s  claimed  figures  for  its
share of trading in continental equities suggest that London is  holding  up
well against its competition.
     Are these figures correct? Not necessarily: deals done through an agent
based  in  London  often  get  counted  as  SEAQ  business  even  when   the
counterpart is based elsewhere and the order has  been  executed  through  a
continental bourse. In today’s electronic age, with many  firms  members  of
most European exchanges, the true location of a deal can  be  impossible  to
pin down. Continental bourses claim, anyway, to  be  winning  back  business
lost to London.
     Financiers in London agree that the glory-days of SEAQ’s  international
arm, when other European exchanges  were  moribund,  are  gone.  Dealing  in
London is now more often a complement to,  rather  than  a  substitute  for,
dealing at home. Big blocks of stock may be bought or sold  through  London,
but broken apart or assembled through  local  bourses.  Prices  tend  to  be
derived from the domestic exchanges; it is  notable  that  trading  on  SEAQ
drops when they are closed. Baron van Ittersum, chairman  of  the  Amsterdam
exchange, calls  this  the  “queen’s  birthday  effect”:  trading  in  Dutch
equities in London slows to a trickle on Dutch public holidays.

     Such competition-through-diversity has encourage European exchanges  to
cut out the red tape that protected their members from outside  competition,
to embrace electronics, and to adapt themselves to the wishes  of  investors
and issuers. Yet the diversity may also have had a cost in lower  liquidity.
Investors,  especially  from  outside  Europe,  are  deterred  if  liquidity
remains divided  among  different  exchanges.  Companies  suffer  too:  they
grumble about the costs of listing on several different markets.
     So the third response of Europe’s bourses to their battle has been pan-
European co-operative ventures  that  could  anticipate  a  bigger  European
market. There are more wishful words here than deeds. Work on two  joint  EC
projects to pool market information,  Pipe  and  Euroquote,  was  abandoned,
thanks mainly to hostility from Frankfurt and London. Eurolist, under  which
a company meeting the listing requirements for one stock  exchange  will  be
entitled to a listing on all, is going forward–but this is hardly  a  single
market. As Paris’s Mr Theodore puts it,  "there  is  a  compelling  business
case for the big European exchanges building the  European-regulated  market
of to-morrow" Sir Andrew Hugh-Smith, chairman of  the  London  exchange  has
also long advocated one European market for professional investors
     One reason little has been done is that bourses have been  coping  with
so many reforms at home. Many wanted to push these through  before  thinking
about Europe. But there is also atavistic nationalism. London, for  example,
is unwilling to give up the leading role it  has  acquired  in  cross-border
trading between institutions; and other exchanges are  unwilling  to  accept
that it keeps it. Mr. Theodore says there is  no  future  for  the  European
bourses if they are forced to row in a boat with one  helmsman.  Amsterdam's
Baron van Ittersum also emphasises that a joint European market must not  be
one under London's control.
     Hence the latest, lesser notion gripping Europe's exchanges:  bilateral
or multilateral links. The futures exchanges have shown the way.  Last  year
four smaller exchanges led by Amsterdam's EOE and OM,  an  options  exchange
based in Sweden and London, joined together in a federation  called  FEX  In
January of this year the continent's two biggest exchanges,  MATIF  and  the
DTB, announced a link-up that was clearly aimed at toppling  London's  LIFFE
from its dominant position Gerard Pfauwadel, MATIF's chairman, trumpets  the
deal as a precedent for other European exchanges. Mr  Breuer,  the  Deutsche
Borse's chairman, reckons that a network of European exchanges  is  the  way
forward, though he concedes that London will  not  warm  to  the  idea.  The
bourses of France and Germany can be expected to follow the MATIF/DTB lead.
     It remains unclear how such link-ups will work, however. The notion  is
that members of one exchange should be able  to  trade  products  listed  on
another. So a Frenchman wanting to buy German government-bond futures  could
do so through a dealer on  MATIF,  even  though  the  contract  is  actually
traded in Frankfurt. That is easy to arrange via screen-based  trading:  all
that are needed are local terminals. But linking an electronic  market  such
as the DTB to a floorbased market with open-outcry trading such as MATIF  is
harder Nor have any exchanges thought through an efficient  way  of  pooling
their settlement systems
     In any case, linkages and  networks  will  do  nothing  to  reduce  the
plethora of European exchanges, or to build a single  market  for  the  main
European blue-chip stocks. For that a  bigger  joint  effort  is  needed  It
would not mean the death of national exchanges, for  there  will  always  be
business for individual investors,  and  in  securities  issued  locally  Mr
Breuer observes that ultimately all business is local. Small investors  will
no doubt go on worrying about currency
     risk unless and until  monetary  union  happens.  Yet  large  wholesale
investors are already used to hedging against it. For  them,  investment  in
big European  blue-chip  securities  would  be  much  simpler  on  a  single
wholesale European market, probably subject to a single regulator
     More to the point, if investors and issuers want such a market, it will
emerge—whether today's exchanges provide it or not. What, after all,  is  an
exchange? It is no more than a system to bring together as many  buyers  and
sellers as possible, preferably under an agreed set of rules. That  used  to
mean a physically supervised trading  floor.  But  computers  have  made  it
possible to replicate the features of a  physical  exchange  electronically.
And they make the dissemination of prices and the job of applying  rules  to
a market easier.
     Most users of exchanges do not know or care  which  exchange  they  are
using: they deal through brokers or dealers. Their concern is to  deal  with
a reputable firm such as S. G. Warburg, Gold-man  Sachs  or  Deutsche  Bank,
not  a  reputable  exchange.  Since  big  firms  are  now  members  of  most
exchanges, they can choose where to  trade  and  where  to  resort  to  off-
exchange deals—which is why there is so  much  dispute  over  market  shares
within Europe This fluidity creates much scope for new  rivals  to  undercut
established stock exchanges.

     6.2 Europe, Meet Electronics

     Consider the experience of the  New  York  Stock  Exchange,  which  has
remained stalwartly loyal to its trading floor. It has been losing  business
steadily for two decades, even in its own listed stocks.  The  winners  have
included NASDAQ and cheaper regional exchanges. New York's trading has  also
migrated to electronic trading systems,  such  as  Jeffries  &  Co's  Posit,
Reuters's Instinct and Wunsch (a computer grandly renamed the Arizona  Stock
Exchange).
     Something similar  may  happen  in  Europe.  OM,  the  Swedish  options
exchange, has an electronic trading  system  it  calls  Click.  It  recently
renamed itself the London Securities and  Derivatives  Exchange.  Its  chief
executive, Lynton Jones,  dreams  of  offering  clients  side-by-side  on  a
screen a choice  of  cash  products,  options  and  futures,  some  of  them
customised  to  suit  particular  clients  The  Chicago  futures  exchanges,
worried like all established  exchanges  about  losing  market  share,  have
recently launched "flex" contracts that combine the virtues  of  homogeneous
exchange-traded products with tailor-made over-the-counter ones.
     American electronic trading systems are trying to break  into  European
markets with similarly imaginative products Instinet and Posit  are  already
active, though  they  have  had  limited  success  so  far.  NASDAQ  has  an
international  arm  in  Europe.  And  there  are  homegrown  systems,   too.
Tradepoint,  a  new  electronic  order-driver  trading  system  for  British
equities, is about to open in London. Even bond-dealers could play  a  part.
Their trade association, ISMA, is recognized British  exchange  for  trading
in Eurobonds; it has a computerized reporting system known as TRAX; most  of
its members use the international clearing-houses Euroclear  and  Cedel  for
trade settlement. It would not be hard  for  ISMA  to  widen  its  scope  to
include equities or  futures  and  options.  The  association  has  recently
announced a link with the Amsterdam Stock Exchange.
     Electronics poses a threat to  established  exchanges  that  they  will
never meet by trying to go it alone. A  single  European  securities  market
(or derivatives market) need not look like an established stock exchange  at
all. It could be a network of the diverse  trading  and  settlement  systems
that already exists, with the necessary computer terminals scattered  across
the EC. It will need to be  regulated  at  the  European  level  to  provide
uniform reporting; an audit trail to allow deals to be retraced from  seller
to buyer; and a way of making sure  that  investors  can  reach  the  market
makers offering the best prices. Existing national regulators  would  prefer
to do all this through co-operation; but some  financiers  already  talk  of
need for a European SEC. An analogy is European civil  aviation’s  reluctant
inching towards a European system of air-traffic control.
     Once  a  Europe-wide  market  with  agreed  regulation  is  in   place,
competition will window  out  the  winners  and  losers  among  the  member-
bourses, on the basis of services and cost, or of the rival  charms  of  the
immediacy and size of quote-driven trading set against the keener prices  of
order-driven trading.  Not  a  cosy  prospect;  but  if  the  EC’s  existing
exchanges do not submit to such a European  framework,  other  artists  will
step in to deny them the adventure.

     7. NEW ISSUES

     Up to now, we have talked about the function of securities  markets  as
trading markets, where one investor who wants to move out  of  a  particular
investment can easily sell to another investor who wishes to  buy.  We  have
not talked about another function of the securities  markets,  which  is  to
raise new capital for corporations–and for the federal government and  state
and local governments.
     When you buy shares of stock on one  of  the  exchanges,  you  are  not
buying a “new issue”. In the case of an old established company,  the  stock
may have been issued decades ago, and the company has no direct interest  in
your trade today, except to register the change in ownership on  its  books.
You have taken over the investment from another investor, and you know  that
when you are ready to sell, another investor will buy it from  you  at  some
price.
     New issues are different. You have probably noticed the  advertisements
in the newspaper financial pages for new issues  of  stocks  or  bonds–large
advertising which, because of the very  tight  restrictions  on  advertising
new issues, state virtually nothing except the name  of  the  security,  the
quantity being offered, and the names of the firms which are  “underwriting”
the security or bringing it to market.
     Sometimes there is only a single underwriter; more often, especially if
the offering is a large one, many  firms  participate  in  the  underwriting
group. The underwriters plan and manage the offering.  They  negotiate  with
the offering company to arrive at a price arrangement  which  will  be  high
enough to satisfy the company but low enough to  bring  in  buyers.  In  the
case of untested companies, the underwriters  may  work  for  a  prearranged
fee. In the case of established companies, the underwriters usually take  on
a risk function by actually buying the securities  from  the  company  at  a
certain price and reoffering them to the public at a slightly higher  price;
the difference, which is usually between 1% and  7%,  is  the  underwriters’
profit. Usually the underwriters have very carefully sounded out the  demand
is disappointing–or if the general market takes a turn for the  worse  while
the offering is under way–the underwriters may be left with securities  that
can’t  be  sold  at  the  scheduled  offering  price.  In  this   case   the
underwriting  “syndicate”  is  dissolved  and  the  underwriters  sell   the
securities for whatever they can get, occasionally at a substantial loss.
     The new issue process is critical for the economy. It’s important  that
both old and new companies have the ability to raise additional  capital  to
meet expanding business needs. For you, the individual  investor,  the  area
may be a dangerous one. If a privately owned company is “going  public”  for
the fist time by offering securities in the public  market,  it  is  usually
does so at a time when its earnings have been rising  and  everything  looks
particularly rosy. The offering also may come at a  time  when  the  general
market is optimistic  and  prices  are  relatively  high.  Even  experienced
investors can have great difficulty in assessing the real  value  of  a  new
offering under these conditions.
     Also, it may be hard for your broker to give you impartial  advice.  If
the brokerage firm is in the underwriting group, or in the  “selling  group”
of dealers  that  supplements  the  underwriting  group,  it  has  a  vested
interest in seeing the securities sold. Also, the commissions are likely  to
be substantially higher than on an ordinary stock. On  the  other  hand,  if
the stock is a “hot issue” in great demand, it  may  be  sold  only  through
small individual allocations to favored customers (who will benefit  if  the
stock then trades in the open  market  at  a  price  well  above  the  fixed
offering price)
     If you are considering buying a new issue, one protective step you  can
take  is  to  read  the  prospectus  The  prospectus  is  a  legal  document
describing the company and offering the securities  to  the  public.  Unless
the offering is a very small one, it can't be made without  passing  through
a registration process with the SEC. The SEC can't vouch for  the  value  of
the offering, but it does act to make sure that essential  facts  about  the
company and the offering are disclosed in the prospectus.
     This requirement of full disclosure was part of the securities laws  of
the 1930s and has been a great boon  to  investors  and  to  the  securities
markets. It works because both the underwriters and the  offering  companies
know that if any  material  information  is  omitted  or  misstated  in  the
prospectus, the way is open to lawsuits from investors who have  bought  the
securities.
     In a typical new offering, the final prospectus isn't ready  until  the
day the securities  are  offered.  But  before  that  date  you  can  get  a
"preliminary prospectus" or "red herring"—so named because  it  carries  red
lettering warning that the prospectus hasn't yet been cleared by the SEC  as
meeting disclosure requirements
     The red herring will not  contain  the  offering  price  or  the  final
underwriting arrangements  But  it  will  give  you  a  description  of  the
company's  business,  and  financial  statements  showing  just   what   the
company's growth and profitability have been over the last several years  It
will also tell you something about the management. If the  management  group
is taking the occasion to sell any large percentage  of  its  stock  to  the
public, be particularly wary.
     It is a very different case  when  an  established  public  company  is
selling additional stock to raise new capital.  Here  the  company  and  the
stock have track records that you can study, and it's not  so  difficult  to
make an estimate of what might be a  reasonable  price  for  the  stock  The
offering price has to  be  close  to  the  current  market  price,  and  the
underwriters' profit margin will generally be smaller But you still need  to
be careful. While the  SEC  has  strict  rules  against  promoting  any  new
offering, the securities  industry  often  manages  to  create  an  aura  of
enthusiasm about a company when an offering is  on  the  way  On  the  other
hand, the knowledge that a large offering is coming may depress  the  market
price of a stock, and there are times when the offering price turns  out  to
have been a bargain
     New bond offerings are a different animal altogether. The bond  markets
are highly professional, and there is nothing glamorous  about  a  new  bond
offering. Everyone knows that a new A-rated corporate
     bond will be very similar to all the old A-rated  bonds.  In  fact,  to
sell the new issue effectively, it is usually priced at  a  slightly  higher
"effective yield" than the current market for comparable older  bonds—either
at a slightly higher interest rate, or a slightly  lower  dollar  price,  or
both. So for a bond buyer, new issues often offer a slight price advantage.
     What is true of corporate bonds applies also  to  U.S.  government  and
municipal issues. When the Treasury comes to market  with  a  new  issue  of
bonds or notes (a very frequent occurrence), the new issue  is  priced  very
close to the market for outstanding (existing) Treasury securities, but  the
new issue usually carries a slight price concession that  makes  it  a  good
buy. The same is true of bonds and notes brought  to  market  by  state  and
local governments; if you are a buyer of  municipals,  these  new  offerings
may provide you with modest price concessions. If the quality  is  what  you
want, there's no reason you shouldn't buy them—even if your broker  makes  a
little extra money on the deal.

     8. MUTUAL FUNDS. A DIFFERENT APPROACH

     Up until now, we have described the ways in which securities are bought
directly, and we have discussed how you can make such investments through  a
brokerage account.
     But a brokerage account is  not  the  only  way  to  invest.  For  many
investors, a brokerage has  disadvantages–the  difficulty  of  selecting  an
individual broker, the commission costs (especially on small  transactions),
and the need to be involved in decisions that many would prefer to leave  to
professionals.  For  people  who  feel  this  way,  there  is  an  excellent
alternative available—mutual funds.
     It isn't easy to manage  a  small  investment  account  effectively.  A
mutual fund gets around this problem by pooling the money of many  investors
so that it can be managed efficiently and economically  as  a  single  large
unit. The best-known type of mutual fund is probably the money market  fund,
where the pool is invested for complete safety in the shortest-term  income-
producing investments. Another large group of mutual funds invest in  common
stocks, and still others invest in long-term bonds,  tax-exempt  securities,
and more specialized types of investments.
     The mutual fund principle has been so successful  that  the  funds  now
manage over  $400  billion  of  investors'  money—not  including  over  $250
billion in the money market funds.

     8.1 Advantages of Mutual Funds

     Mutual  funds  have  several  advantages.  The  first  is  professional
management. Decisions as to which securities to buy, when to  buy  and  when
to sell are made for you by professionals. The size of  the  pool  makes  it
possible to pay  for  the  highest  quality  management,  and  many  of  the
individuals  and  organizations  that  manage  mutual  funds  have  acquired
reputations for being among the finest managers in the profession.
     Another of the advantages of a mutual fund is diversification.  Because
of the size of the fund, the managers can easily diversify its  investments,
which means that they can reduce risk by spreading the total dollars in  the
pool over many different securities. (In a common stock  mutual  fund,  this
means holding  different  stocks  representing  many  varied  companies  and
industries.)
     The size of the pool gives you other advantages. Because the fund  buys
and sells  securities  in  large  amounts,  commission  costs  on  portfolio
transactions are relatively low And in some cases the  fund  can  invest  in
types of securities that are not practical for the small investor.
     The funds also give you convenience First, it's easy to  put  money  in
and take it out The funds technically are "open-end"  investment  companies,
so called because  they  stand  ready  to  sell  additional  new  shares  to
investors at any time or buy back ("redeem") shares sold previously You  can
invest in some mutual funds with as little  as  $250,  and  your  investment
participates fully in any growth in value of the fund and in  any  dividends
paid out. You can arrange to have dividends reinvested automatically.
     If the fund is part of a larger fund group, you can usually arrange  to
switch by telephone within the funds in the group—say from
     a common stock fund to a money market fund or tax-exempt bond fund, and
back again at will. You may have to pay a small charge for the switch.  Most
funds have toll-free "800" numbers that make it  easy  to  get  service  and
have your questions answered.

     8.2 Load vs. No-load

     There are "load" mutual funds and  "no-load"  funds.  A  load  fund  is
bought through a broker or salesperson who helps  you  with  your  selection
and charges a commission ("load")—typically (but not  always)  8.5%  of  the
total amount you invest. This means that only 91.5% of the money you  invest
is actually applied to buy shares in the pool. You  choose  a  no-load  fund
yourself without the help of a broker  or  salesperson,  but  100%  of  your
investment dollars go into the pool for your account.
     Which are better—load or no-load funds? That really depends on how much
time and effort you want to devote to  fund  selection  and  supervision  of
your  investment.  Some  people  have  neither  the  time,  inclination  nor
aptitude to devote to the task—for them, a load fund may be the answer.  The
load  may  be  well  justified  by  long-term  results  if  your  broker  or
salesperson helps you invest in a fund that performs outstandingly well.
     In recent years, some successful funds  that  were  previously  no-load
have introduced small sales charges of 2% or  3%.  Often,  these  "low-load"
funds are still grouped together with the no-loads, you generally still  buy
directly from the fund rather than through a broker. If  you  are  going  to
buy a high-quality fund and hold it a number of years,  a  2%  or  3%  sales
charge shouldn't discourage you.

     8.3 Common Stock Funds

     Apart from the money market funds,  common  stock  funds  make  up  the
largest and most important fund group. Some common  stock  funds  take  more
risk and some take less, and there is a wide range  of  funds  available  to
meet the needs of different investors.
     When you see funds "classified by objective", the  classifications  are
really according to the risk of the investments selected,  though  the  word
"risk" doesn't appear in  the  headings.  "Aggressive  growth"  or  "maximum
capital gain" funds are those that take the greatest  risks  in  pursuit  of
maximum growth. "Growth" or "long-term growth" funds may be  a  shade  lower
on the risk scale. "Growth-income" funds are generally considered middle-of-
the-road. There are also common stock "income" funds,  which  try  for  some
growth as well as income, but stay on the  conservative  side  by  investing
mainly in established companies that pay sizable dividends to their  owners.
These are also termed "equity income" funds,  and  the  best  of  them  have
achieved excellent growth records.
     Some common stock funds concentrate  their  investments  in  particular
industries or sectors of the economy. There are funds that invest in  energy
or natural resource stocks;  several  that  invest  in  gold-mining  stocks,
others that  specialize  in  technology,  health  care,  and  other  fields.
Formation of this type of specialized or  "sector"  fund  has  been  on  the
increase.

     8.4 Other Types of Mutual Funds

     There are several types of mutual funds other  than  the  money  market
funds and common stock funds. There  are  a  large  number  of  bond  funds,
investing in various assortments of corporate  and  government  bonds  There
are tax-exempt bond funds, both long-term and shorter-term,  for  the  high-
bracket investor  There  are  "balanced"  funds  which  maintain  portfolios
including both stocks and bonds, with the objective  of  reducing  risk  And
there are specialized funds which invest  in  options,  foreign  securities,
etc.

     8.5 The Daily Mutual Fund Prices

     One advantage of a mutual fund is the ease with which you can follow  a
fund's performance and the  daily  value  of  your  investment.  Every  day,
mutual fund prices are listed in a special table in  the  financial  section
of many newspapers, including the Wall Street Journal. Stock funds and  bond
funds are listed together in a single alphabetical table, except that  funds
which are part of a major fund group are  usually  listed  under  the  group
heading (Dreyfus, Fidelity, Oppenheimer, Vanguard, etc.).
     The listings somewhat  resemble  those  for  inactive  over-the-counter
stocks. But instead of "bid" and "asked", the  columns  are  usually  headed
"NAV" and "Offer Price". "NAV" is the net  asset  value  per  share  of  the
fund. it is each share's proportionate interest in the  total  market  value
of the fund's portfolio of securities, as calculated each night It is  also,
generally, the price per share at which  the  fund  redeemed  (bought  back)
shares submitted on that day by shareholders who wished to sell  The  "Offer
Price" (offering price) column shows the price paid by investors who  bought
shares from the fund on that day. In the case of a load fund, this price  is
the net asset value plus the commission 01 "load" In the case of  a  no-load
fund, the symbol "N.L." appears in the offering price  column,  which  means
that shares of the fund were sold  to  investors  at  net  asset  value  per
share, without commission. Finally, there is  a  column  on  the  far  right
which shows the change in net asset value compared with the previous day.

     8.6 Choosing a Mutual Fund

     Very few investments of any type have surpassed  the  long-term  growth
records of the best-performing common stock funds. It may help to  say  more
about how you can use these funds.
     If you intend to buy load funds through a broker or  fund  salesperson,
you may choose to rely completely on this person's recommendations. Even  in
this case, it may be useful to know something about sources  of  information
on the funds.
     If you have decided in favor of no-load funds and intend to  make  your
own selections, some careful study is obviously a necessity.  The  more  you
intend to concentrate on growth and accept the risks that go  with  it,  the
more important it is that you  entrust  your  money  only  to  high-quality,
tested managements.
     There are several publications that  compile  figures  on  mutual  fund
performance for periods as long as 10 or even 20  years,  with  emphasis  on
common stock funds. One that is found in many libraries is the  Wiesenberger
Investment Companies Annual Handbook.  The  Wiesen-berger  Yearbook  is  the
bible of the fund industry, with extensive descriptions of funds, all  sorts
of other data, and plentiful  performance  statistics.  You  may  also  have
access to  the  Lipper  Mutual  Fund  Performance  Analysis,  an  exhaustive
service subscribed to mainly by professionals. It  is  issued  weekly,  with
special  quarterly  issues   showing   longer-term   performance.   On   the
newsstands,  Money  magazine  publishes  regular  surveys  of  mutual   fund
performance; Barren's weekly  has  quarterly  mutual  fund  issues  in  mid-
February, May, August and November; and Forbes magazine  runs  an  excellent
annual mutual fund survey issue in August.
     These sources (especially Wiesenberger) will also give you  description
of the funds, their  investment  policies  and  objectives.  When  you  have
selected several funds that look promising, call each fund (most have  toll-
free "800" numbers) to get its prospectus and recent financial reports.  The
prospectus for a mutual fund plays the same role as that described  in  "New
Issues." It  is  the  legal  document  describing  the  fund's  history  and
policies and offering the fund's shares for sale. It  may  be  dry  reading,
but the prospectus and financial reports together should give you a  picture
of what the fund is trying to do and how well  it  has  succeeded  over  the
latest 10 years.
     In studying the records of the funds, and in requesting material, don't
necessarily restrict yourself to a single "risk" group. The best  investment
managers sometimes operate in  ways  that  aren't  easily  classified.  What
counts is the individual fund's record.
     Obviously, you will want to narrow your choice to  one  or  more  funds
that have performed well in relation to other funds in the same risk  group,
or to other funds in general. But don't rush to  invest  in  the  fund  that
happens to have performed best in the  previous  year;  concentrate  on  the
record over five or ten years. A fund that leads the pack for a single  year
may have taken substantial risks to do so. But a  fund  that  has  made  its
shareholders' money grow favorably over a ten-year period, covering both  up
and down periods in the stock market, can be considered  well  tested.  It’s
also worth  looking  at  the  year-to-year  record  to  see  how  consistent
management has been.
     You will note that the range of fund performance over most  periods  is
quite wide. Don’t be surprised. As we have  stressed,  managing  investments
is a difficult art. Fund managers are generally  experienced  professionals,
but their records have nevertheless ranged from remarkably good to  mediocre
and, in a few cases, quite poor. Pick carefully.