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 ½ of 1%. A change of ½% 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 7/8 | 37 5/8 | Cons Ed | 2.68 | 5.4 | 12 | 909 | 49 3/8 | 48 7/8 | 49 1/4 | +1/4 |
| 91 1/8 | 66 1/2 | Gen El | 2.52 | 2.8 | 17 | 11924 | 91 3/8 | 89 5/8 | 90 | -1 |
| 41 3/8 | 26 1/4 | Mobil | 2.20 | 5.4 | 10 | 15713 | 41 | 40 1/2 | 40 7/8 | +5/8 |
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.