Stock Market
Sat, 02/14/2009 - 10:04 — admin
In business and finance, a share (also referred to as equity share) of stock means a share of ownership in a corporation (company). In the plural, stocks is often used as a synonym for shares especially in the United States, but it is less commonly used that way outside of North America.
In business and finance, a share (also referred to as equity share) of stock means a share of ownership in a corporation (company). In the plural, stocks is often used as a synonym for shares especially in the United States, but it is less commonly used that way outside of North America. In the United Kingdom, South Africa, and Australia, stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities.
Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares" (or "convertible preference shares" in the UK).
Although there is a great deal of commonality between the stocks of different companies, each new equity issue can have legal clauses attached to it that make it dynamically different from the more general cases. Some shares of common stock may be issued without the typical voting rights being included, for instance, or some shares may have special rights unique to them and issued only to certain parties. Note that not all equity shares are the same.
The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the market, the price of a stock is directly proportional to the demand. However, there are many factors on the basis of which the demand for a particular stock may increase or decrease. These factors are studied using methods of fundamental analysis and technical analysis to predict the changes in the stock price. A recent study shows that customer satisfaction, as measured by the American Customer Satisfaction Index (ACSI), is significantly correlated to the stock market value. Stock price is also changed based on the forecast for the company and whether their profits are expected to increase or decrease.
A stock market, or equity market, is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
The stock market goes up and the stock market goes down, but not all ups and downs are the same. It is important to put large gains or declines in perspective to better understand what is happening.
One of the best gauges to use is how expensive or cheap the overall stock market is at that moment.For that, we turn to the price earnings ratio for the Standard & Poors 500 Index.
The Stock Market: We use the S&P 500 because most investment professionals consider it “the market.” The Dow (Dow Jones Industrial Average) is more volatile because it represents only 30 stocks. You will always see bigger swings in it than you will in the S&P 500.
The PE for the S&P 500 is a simple average of all the PEs for the 500 stocks in the index.
You’ll remember that PE express investors’ confidence in future earnings.
A high PE means investors have high hopes for future earnings. A low PE may mean investors have lost confidence in a company’s ability to produce consistent future earnings. For a review on PEs, check out this article.
High PE: When the PE for the S&P 500 is high, many would say the market is overpriced – that is investors are paying too much for stocks (investors’ perception of future earnings in addition to current valuations).
Many events cause the market to move up or down from day to day. However, if the market is “over-bought,” you can expect greater volatility and the odds of a major sell-off or correction are higher.
Bull Stock Market : A high PE for the S&P 500 is not an indicator of a bull market, but may show up when investor enthusiasm over-reaches reality.Unrealistic expectations of continued high performance have a way of being dashed, which is what happened when the dot.com bubble burst in 2001.
A sell-off when the S&P 500 PE is in a moderate range may mean nothing more than a reaction to current events and not the beginning of a protracted down market.
That’s not written in stone, but it makes sense that sell-offs when the S&P 500 PE is unusually high can be like air venting out of an over-inflated balloon.
The stock market is a dynamic and complex environment. Simple answers are seldom complete answers, so when trying to make sense of what is happening consider the PE of the market as one factor in your investigation.
When the stock market is showing its volatility, whether predominately up or down, it is easy to offer reasons the market is wrong.
A number of pundits and predictors make a decent living telling investors why the market is too high or too low.---By Ken Little, About.com
