Stock market


A stock market is a market (in the wider sense of the word) for the trading
of company stocks or shares. Trading of shares in larger companies generally
takes place as part of a stock exchange. The state of a particular stock
market (the trade of particular types of shares) is often summarised by
means of a Stock market index.

Since the discussion of how prices may rise and fall. Each of the 3000 or so
stocks traded on the NYSE is handled by a specialist--all buys and sells are
directed to him, and he matches buyers and sellers. Even before the crash,
this was a necessary function because of the conditions that are frequently
attached to transactions--someone may want to pay $40 per share but only for
round lots (blocks of 100 shares), another person may want to sell only with
early settlement. Since then, though, specialists have the authority and the
obligation to prevent the market from running wild. A specialist may halt
the fall of a stock price by using his own company's funds to buy shares,
which can later be sold gradually. He has a reserve of the stock which can
release for sale if a shortage is driving the price up too rapidly. Trading
can be suspended altogether.

An option is a contract to buy or sell something at an agreed-upon price
during a specified period. A buyer who believes that the price of a stock
will rise can enter a contract known as a "call" which gives him the right
to buy another's stock at a date three to nine months in the future. He pays
a fee to the owner of the stock and will forfeit it if he does not exercise
the option. But if the stock price rises enough, he can exercise the option
and buy the stock at the fixed price, then re-sell it for a higher price to
recover his premium and make a profit.

Someone who thinks that the price of a stock is about to fall can write a
"put" contract with someone else who agrees to buy the stock at a fixed
price. He does not have to own the stock at the time the contract is made.
Again, he pays a premium. But if the stock price does fall, he can buy the
stock at a low price on the market and then sell it for agreed-upon higher price.

Option contracts are traded like stocks, often by people who have no
intention of exercising them. Although there is a guaranteed loss of the
premium when an option is not exercised, there is enormous potential profit
from trading the option itself--its price rises or falls with the price of
the underlying stock. Someone who has a guaranteed buyer for 10,000 shares
of stock at $35 has a contract of enormous value if the price of the stock
falls to $10. He may not want to invest $100,000 to fulfill the contract and
earn $350,000. But someone will want to buy the contract from him for more
than he paid for it.

There are also two sorts of trades involving cash or stock not actually
owned, short selling and margin buying. In short selling, someone sells
stock that they don't actually own, hoping for the price to fall. They must
eventually buy back the stock. In margin buying, someone borrows money to
buy the stock and hopes for it to rise. Most industralized countries have
requlations which require that if the borrowing is based on collateral from
other stocks, then it can be at only a certain percentage of those other
stocks value. Other rules include a prohibition of freeriding, that is,
putting in an order to buy stocks without paying intially, and then selling
them and using part of the proceeds to make the original payment.

Before 1929, there were few regulations governing trades. This was taken
advantage of by the so-called "Robber Barons", to amass the large fortunes
for themselves using (today illegal) techniques.

Since then, there have been periodic attempts to solve other perceived
business problems with further regulation. As of this writing (in 2002)
there is a stock market downturn that is prompting such considerations in
the United States.