How the Stock Market Works

Contents

• Introduction xv

• Why Stocks Are Offered 1
• The Size of the Stock Market 2
• A Word About Bonds 3
• Why Individuals and Institutions Buy Stocks 3
• Dividends 4
• Capital Gains, or Growth 5
• Short Selling 6
• Risks and Rewards of Investing 8
• Common Stocks 10
• Preferred Stocks 12
• Stock Rights 17
• Stock Warrants 18
• Summary 18

• Cash Accounts 20
• Margin Accounts 21
• Security Positions: Long, Short, Flat 23
• Pricing Stocks: Points and Fractions 25
• The Figuration of Current Yield 27
• Newspaper Listings 28

• The Primary Market--How Busineses Are Capitalized 34
• Incorporating the Business 35
• The Initial Public Offering (IPO) 40
• After the Offering Is Completed 54

• Full Service Versus Discount 57
• Selecting a Brokerage Firm and an Account Executive 62
• The Sales Assistant 66

• The New York Stock Exchange 68
• Listing Requirements and Criteria of the NYSE 69
• NYSE Maintenance Listing Requirements/Delisting from NYSE 71
• The NYSE Floor 72
• The Delivery of Orders to the NYSE: Superdot and the Broker Booth Support System 78
• NYSE's Online Comparison System 80
• The Auction System 80
• How Orders Are Executed in the Crowd 83
• Crossing Stock 88
• After (Off) Hours Trading--A/K/A Crossing Sessions 89
• The Short Sale 91
• Institutional Trades 93
• Decimalization 95
• Other Important Features of the NYSE 95
• AMEX--The American Stock Exchange 101

• The Specialst's Role: As Dealer, as Broker 106
• The Role of Automation and Telecommunication 110
• Other Duties of the Specialist 112
• Odd-Lot Trading 116
• Assigning Securities to the Specialist 120
• Conclusion 121

• Following an Order Being Executed OTC 126
• The Over-the-Counter Bulletin Board: OTCBB 130
• Types of Orders 133
• Compliance Regulations of the NASD 135
• NASD Rules of Fair Practice 137

• NASD: National Association of Securities Dealers, Inc. 140
• Requirements for Securities to Become Listed on Nasdaq 142
• November 1998 Merger with the American Stock Exchange 146
• Nasdaq-100 Index Tracking Stock (AMEX Symbol QQQ) 147
• The Major Nasdaq Stock Market Indexes 147
• Expansion of Nasdaq Worldwide: Globalization of Stock Trading 149
• Monitoring the Markets 150
• Other Major Developments with the Nasdaq 151
• Conclusion 158

• Investment Companies 160
• Management Companies: Closed-End and Open-End Funds 162
• Pricing a Closed-End Fund 163
• Pricing an Open-End Fund 163
• Variety of Types of Open-End (Mutual) Funds for Bonds 168
• Conclusion 169

• The OCC and the Exchanges That Offer Option Trading 171
• Options: A Definition and Explanation of How Stock Option Contracts Generally Function 172
• Types of Option Contracts: Puts and Calls 176
• Option Premium: The Price of the Option Contract 182
• Options as a Hedging Tool 190
• Miscellaneous Option Topics 192
• Conclusion 193

• The Depository and Clearing House 196
• The Order Department 198
• P&S Department 199
• Margin Department 206
• Stock Record Department 210
• Accounting Department 212
• Dividend Department 214
• Proxy Department 218

• The First American Analyst 222
• The Analysts 231
• The Technical Approach 241

• Current Assets and Current Liabilities 261
• Can the Corporation Pay Its Way? 262
• Using Debt and Capital Structure of a Corporation as Sources of Long-Term Funds 263
• The Income Statement 264

• Brokerage Firms in the World of Online Trading 270
• How an Investor Establishes Online Trading 273
• Wireless and Touch Tone Trading 274
• The Risks of Online Trading 275
• Protection for Online Investors 279
• Conclusion 281

• Stock Markets Around the World 283
• Global Investing 286
• Effect of Extended / After-Hours Trading on Globalization 287
• Globalization: The Stock Exchanges 288
• Brokerage Firms and Online Access 292
• Conclusion 293

• The Taxation of Interest 295
• The Taxation of Dividends 295
• The Taxation of Capital Gains 296
• Multiple Positions 297
• Stock Gifts to Minors 298
• Stocks Received as Gifts and Inheritances: Taxable Amounts and Basis 298

• The Fair and Orderly Market 306
• Program Trading Myths 313
• The Global Crash 314
• The Stock Market and the Economy 317
• Conclusion 319
• Glossary 320
• Index 399
• About the Author 423