Chapter 12 Objectives
Section 3: Investing in Equities, Futures, and Options
Describe the major ___________ exchanges.
Explain how stock market _________________ is _____________.
Introduction
•In addition to financial assets, investors may buy ________________.
•Equities are stocks that represent ownership ____________ in corporations.
•The markets for equities are reasonably competitive because there are a large number of buyers and
sellers, and investors possess reasonably good information.
•Advances in technology make this process even more _________________.
Market Efficiency
•Many things ________________ the price of equities.
–Some companies may have relatively few outstanding shares to be traded, while others have a large
number.
–Some companies are profitable; others are not.
 _______________________ also affect stock prices.
–For example, two companies may be equal in all respects, but one may have far better prospects for
growth.
–As a result, _____________ prices can vary considerably from one company to the next.
•One implication for the investor is that if all stocks are priced about right, it does not matter which
ones you purchase.
•Because of this, ______________ diversification–the practice of holding a large number of different
stocks so that increases in some can offset unexpected declines in others–is a popular strategy.
•There are _______________ ways to purchase equities.
•Opening an Internet account with a _____________ brokerage firm is one means.
•Or, the investor may enlist the assistance of a ___________________–a person who buys or sells
equities for clients.
•The broker arranges to have the stocks purchased at a stock exchange, or supplies the __________
from an _______________, or buys them from some other broker.
Organized Stock Exchanges
•A number of organized _________________ exchanges exist–places where buyers and sellers
meet to trade securities.
•An organized exchange gets its name from the way it ______________ business.
•Members pay a fee to join, and trades can only take place on the floor of the _____________.
The New York Stock Exchange
•The oldest, largest, and most prestigious of the organized stock exchanges in the United States is
the New York Stock Exchange (__________), located on Wall Street in New York City.
•The NYSE has about 1,400 ___________, or memberships, that allow access to the trading floor.
•The members may pay several _____________ dollars for each seat.
•The NYSE lists stocks from more than 3,000 companies.
•The firms must meet stringent requirements related to _______________ and _______, which
virtually guarantee that the companies will be among the largest, most profitable __________ held
companies.
•During the last ___ months, Hasbro _____ for as much as $37 and as ________ as $16.37 a share.
•Its annual ______________ (Div) is $.24, which is paid in four equal installments.
•The _________ (Yld) is the dividend ______________ by the closing price.
•The ____, or price-earnings ratio, is a stock’s _________ divided by annual earnings of each share
of ____________ stock outstanding.
•Hasbro ___________ at $.50 lower than the day __________, as indicated by 1/2 under _____
Change (Net Chg).
The American Stock Exchange
 Another prestigious national exchange is the _________________ Stock Exchange (AMEX),
which is also located in New York City.
•It has approximately 1,000 listed stocks.
•For many years, the AMEX was the _____________ largest organized exchange in the country
behind the NYSE.
•Its growth then ____________, and some of the regional exchanges overtook the AMEX.
 Overall, the companies represented on the AMEX tend to be ___________ and more
______________________ than those __________ on the NYSE.
Regional Stock Exchanges
•The _____________ exchanges include the Chicago, Pacific, Philadelphia, Boston, and Memphis
exchanges, along with some smaller exchanges in other _________.
•Many of these exchanges originally __________ corporations that were either too small or too new
to be listed on the NYSE or the AMEX.
•The regional stock exchanges also meet the needs of the smaller and middle-sized corporations in
their regions.
Global Stock Exchanges
•Stock exchanges can be found throughout the __________.
•Exchanges operate in such cities as Sydney, Tokyo, Hong Kong, Singapore, Johannesburg, and
Frankfurt.
•Developments in computer ________________ and electronic trading have linked these markets so
that most major stocks can be traded around the _________, somewhere in the world.
The Over-the-Counter Market
•____________ the importance of the organized exchanges, the majority of stocks in the United
States are not traded on exchanges.
•Instead, they are traded on the ____________________ market (OTC)–an electronic marketplace
for securities that are not traded on an organized exchange.
•Securities traded over the counter are listed in a sophisticated computer network called the National
Market System (________).
•The members of the _____ market belong to the National Association of Securities Dealers (NASD).
•The main difference between a ____________ listing and the NYSE is that few OTC stocks pay
dividends, mostly because they are issued by new firms.
•The organized exchanges and the OTC market may _________, but this means little to investors.
•An investor who opens an _____________ account with a brokerage firm may buy and sell stocks in
both markets.
 When the investor places an order over the Internet to buy shares, the broker forwards the order
to the exchange where the stock is ____________ and the purchase is made there–whether it be
on the NYSE, AMEX, or OTC.
Measures of Stock Performance
•Because most investors are _______________ about the performance of their __________, they
often consult two popular _________________.
The Dow-Jones Industrial Average.
•The _________________ Industrial Average (DJIA) is the most popular and widely publicized
measure of stock market performance on the NYSE.
–In 1884, the Dow-Jones corporation published the average closing _________ of 11 active stocks.
–In 1928, coverage was ______________ to 30 stocks.
–Since then, some stocks have been added, and others deleted, but the ___________ remains
constant at 30.
•Because of these changes, the ______ is no longer a mathematical _____________ of stock prices.
•Also, the evolution of the DJIA has obscured the meaning of a “____________” change in the index.
Standard & Poor’s 500
•Another popular benchmark of stock performance is the Standard & Poor’s 500 (_____________).
•It uses the price changes of 500 representative stocks as an __________________ of overall market
performance.
•Because the sum of 500 stock prices would be very large, it is reduced to an ________ number.
•Unlike the Dow-Jones, the Standard & Poor’s 500 reports on stocks listed on the NYSE, AMEX, and
OTC markets.
Bull vs. Bear Markets
 Investors often use colorful terms to describe which way the market is ____________.
•For example, a ______ market is a “strong” market with the prices moving up for several months or
years in a row.
•A _______ market is a “mean” market, with the prices of equities moving sharply down for several
months or years in a row.
•As you can see, these two terms take their names from the characteristics of the animals they are
named after.
Trading in the Future
 Markets are defined according to the _____ of the financial asset and whether or not it can be
____________.
•Another attribute of a financial asset is ________, which leads to a discussion of spot, futures, and
options markets.
Spot and Futures Markets
•A _______ market is a market in which a transaction is made immediately at the prevailing _______.
•The term spot means “_____________” and is used to distinguish this market from two other
markets that trade in the future.
•Sometimes the exchange takes place later on, ___________ than right away.
–This can be arranged with a ____________ contract–an agreement to buy or sell at a _________
date in the future at a predetermined price.
–For example, a buyer agrees to buy a specified amount of gold at $280 an ounce from a seller, who
promises delivery in six months.
–When the settlement date arrives, the buyer takes possession of the gold and pays the seller $280–
regardless of the market price.
•_____________ markets are the marketplaces in which futures contracts, or “futures,” are bought
and sold.
•Many of these markets are affiliated with the grain and livestock exchanges that originated in the
_____________.
•Futures markets include the New York Mercantile Exchange, the Chicago Board of Trade, the
Chicago Mercantile Exchange, the New York ___________ Exchange, and the Kansas City Board of
Trade.
Options Markets
•____________ are contracts that provide the right to purchase or sell commodities or financial
assets at some point in the future at a price agreed upon today.
•Options are closely related to futures; however, options give one of the parties the ______________
to back out.
•For example, you may pay $5 today for a _____ options–the right to buy a share of stock at a
specified price some time in the future.
•If you were interested in selling instead of buying, you would have purchased a ______ option–the
right to sell a share of stock at a specified price in the future.
•Options ______________ are the markets in which options are traded.
•Most of the exchanges that offer futures _______ sell options.