Section 3 The Stock Market
Preview
Objectives
After studying this section you will be able to:
- Understand the benefits and risks of buying stock.
- Describe how stocks are traded.
- Identify how stock performance is measured.
- Explain the causes and effects of the Great Crash of 1929.
Section Focus
Corporations sell stock to raise money for starting, running, or expanding their businesses. Investors buy stocks to profit through regular payments, called dividends, or by selling the stock at a price higher than the purchase price. Stocks are traded on secondary markets called stock exchanges.
Key Terms
- share
- equities
- capital gain
- capital loss
- stock split
- stockbroker
- brokerage firm
- stock exchange
- Nasdaq OTC market
- futures
- options
- call option
- put option
- bull market
- bear market
- The Dow
- S & P 500
- Great Crash
- speculation
The New York Stock Exchange is a tangle of telephones, video monitors, computer screens, and frantic activity. The wrong decision may mean the difference between gaining or losing thousands of dollars. This is one of the places where stock is bought and sold—and fortunes are made and lost. Just what is stock, exactly how is it traded, and when is it a good investment?
Buying Stock
Besides bonds, corporations can raise funds by issuing stock, which represents ownership in the corporation. Stock is issued in portions known as shares. By selling shares of stock, corporations raise money to start, run, and expand their businesses. Stocks are also called equities, or claims of ownership in the corporation.
Benefits of Buying Stock
There are two ways for stockholders to make a profit:
- Dividends As you read in Chapter 8, many corporations pay out part of their profits as dividends to their stockholders. Dividends are usually paid four times a year (quarterly). The size of the dividend depends on the corporation's profit. The higher the profit, the larger the dividend per share of stock.
Daytime at the Chicago Board of Trade (top photo) shows the frantic pace of trade. The frenzied pace of a day of trading is perhaps even better suggested by a view of the Chicago Stock Exchange at night (bottom photo).
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