HOW TO READ THE DAILY STOCK MARKET REPORT
Stock
Div.
843/4 541/2 Quak Ot
High Low
1.60
2.1
Yld%
17
P-E Ratio
The price of Quaker
Oats shares in
current year.
Annual
dividend per
share in
dollars to
stockholders
Yield = Div. x
100 / closing
price
Price-earnings ratio: Number of shares
In day that
the number of times changed hands (54,600).
the current market
value of the company
exceeds its annual
profits.
Most institutional investment takes place in
stocks traded on the two major exchanges:
the New York Stock Exchange, where stocks
of the nation's largest companies are traded,
and the smaller American Stock Exchange,
also located in New York. In addition, there
are half a dozen regional exchanges around
the country that trade many of the same
stocks listed on the major exchanges. But the
stocks of the overwhelming number of companies, the tens of thousands of small corporations that have publicly traded stocks, are
not sold on any stock exchange floor. They are
sold by individual brokers "over the counter."
The stock exchanges do not handle new issues of stock. When a company wishes to issue
new shares of stock, it negotiates a sale of
the stock to an investment bank, or, if it is a
major corporation raising a very large
amount of money, to a group of investment
banks referred to as a consortium. Investment
banks then sell the stocks through brokers to
the public. If there is a bullish market for the
stock, an investment bank can sell the stock
for a great deal more than it paid the issuing
company. If there is not much demand for the
stock, the bank can lose money.
Small "start-up" companies are frequently
financed by venture capitalists, financiers
who provide funds for promising new ventures in return for part ownership in the company. If the company succeeds well enough
to "go public," that is, make a stock offering
to the general public, the venture capitalist
Sales 100s
546
High Low Close
751/2 741/2 75
Net Chg.
+ 1/ 2
Net price change
from previous
day's closing price
(expressed as a
fraction of a
dollar).
can reap rewards many times the amount of
the capital invested in the company.
Although the stock exchanges do not trade
new issues of stock, they are important to the
ability of companies to raise investment capital.
Investors would be reluctant to buy stock in a
company if there were no ready way to
dispose of it when they want to get their
money out. The efficiency of the U.S. stock
market is important to the dynamism of our
economy. However, excessive speculation in
the stock market can create big problems, as it
did in the financial collapse of 1929. Running
with the bulls is exciting, but a bull can cause
havoc in a china shop economy.
For Thought
1. Are shares of ownership of most business
organizations traded in the stock market?
What types of businesses are traded
there?
2. Which of the functions of business firms
are most affected by the stock market?
How?
3. Should the Securities and Exchange
Commission reduce the amount of
speculation in the stock market by prohibiting investors from buying stock on
credit, paying only a fraction in cash and
pledging the stock as collateral on the
balance owed? Why should such "buying on the margin" be allowed or why
should it be prohibited?
113
What Determines a Firm's Profits?
fixed costs production costs which do not
change with changes in the quantity of
output.
The objective of producers in all types of business organizations is to make the largest possible profit. Profit is the difference between the revenue a firm takes in and the costs it
incurs. For the farmers in financial difficulty, their profits
were negative—costs were greater than revenues. Like other
producers, farmers try to maximize profits or minimize losses.
This is accomplished by producing the most profitable
quantity of output with the resources available. We will use a
farm operation to illustrate how costs and revenue are determined and how they determine profits.
Costs To illustrate how a firm's costs affect production decisions we will use the example of a chicken farm. A chicken
farm with 100,000 laying hens might have three employees and
an owner-manager. A large percentage of the hens have to be
replaced each year because hens have a limited time of
productivity. During its productive span a hen will lay, on
the average, about 250 eggs a year. Modern chicken farms keep
the hens in cages with automated feeding equipment. In
contrast to farms that grow crops, they do not need much
land, just a few acres.
As with other businesses, chicken farms have two
categories of costs: fixed and variable. Fixed costs are those
A major cost of chicken farming is hen depreciation.
114