STOCK MARKET

STOCK MARKET. Originating in the Netherlands and Great Britain during the seventeenth century, stock exchanges initially enabled investors to buy and sell shares of companies to raise money for overseas expansion. Called "bourses," these exchanges eventually began dealing in the public securities of banks, insurance companies, and manufacturing firms. Until World War I, the London Stock Exchange was the largest and busiest in the world. Although inaugurated in 1792, when twenty-four New York merchants signed the Buttonwood Agreement, and formally organized in 1817, the New York Stock Exchange (NYSE), which is located on Wall Street in New York City, was small by comparison to the European bourses, with an average of only 100 shares traded per session. The NYSE attained preeminence only after World War I, which had disrupted the financial markets of Europe and transformed the United States into an economic power of the first order.

The Stock Market Crash

Flourishing throughout the 1920s, the stock market crashed on 29 October 1929, bringing to an end the era of economic prosperity and ushering in a new, impoverished age that few understood. Yet the stock market crash did not cause the Great Depression of the 1930s. Rather, the crash was one of the more dramatic symptoms of structural weaknesses in the national and international economies. Between February 1928 and September 1929 prices on the New York Stock Exchange steadily rose. For eighteen months, investors enjoyed a "Bull" market in which almost everyone made money. The cumulative value of stocks in 1929 reached an estimated $67.5 billion, with 1 billion shares traded. The price of stock, however, had long ceased to bear any relation to the earning power of the corporations issuing it. The ratio of corporate earnings to the market price of stocks climbed to 16 to 1; a 10 to 1 ratio was the standard. In the autumn of 1929, the stock market began to fall apart.

On 19 October 1929, stock prices dropped sharply, unnerving Wall Street financiers, brokers, and investors. Big bankers tried to avert a crash by conspicuously buying stock in an attempt to restore public confidence. Ten days later, on "Black Tuesday," all efforts to save the market failed. By 13 November, the crash had wiped out $30 billion in stock value. Most knowledgeable Americans, including Herbert Hoover who had been elected president in November 1929, viewed the crash as a necessary and healthy adjustment provoked by inflated stock and undisciplined speculation. Only paper empires had toppled, Americans reassured themselves. The crash, though, brought down the economies of a number of European countries. The American economy followed. The Great Depression had begun.

What Went Wrong

By 1928 the value of such stocks as the Radio Corporation of America, Radio-Keith-Orpheum (RKO), Westinghouse, United Aircraft, and Southern Securities were grossly inflated, exceeding any reasonable expectation of future earnings. Brokers, however, encouraged speculation in these and other stocks by permitting investors to buy shares on "margin," that is, on credit. Investors paid as little as 25 percent of the purchase price out of their own capital reserves, borrowing the remainder from brokerages or banks and using the stock they were about to buy as collateral. The abrupt decline in stock prices triggered panic selling and forced brokers to issue a "margin call," which required all who had borrowed from them to repay their debts in full. Many had to liquidate their remaining stock to meet their financial obligations, thereby precipitating the crash.

Remedying Abuses

Investigations conducted during the 1930s by the Senate Banking and Currency Committee, under the direction of chief counsel Ferdinand Pecora, uncovered ample evidence of fraud, corruption, misrepresentation, and other unsavory practices in an essentially unregulated stock exchange. To remedy these abuses, Congress passed the Securities Act of 1933 and the Securities and Exchange Act of 1934, initiating federal regulation of the stock market. The Securities Act required all companies issuing stock to inform the Federal Trade Commission of their financial condition. Complaints that the new law was too intrusive prompted Congress to revise it. The resulting Securities and Exchange Act established the Securities and Exchange Commission (SEC) and granted it extensive authority to monitor stock exchanges, brokerage houses, and independent dealers. The SEC gained additional regulatory powers through the Public Utilities Holding Company Act of 1935, the Investment Companies Act of 1940, and the Investments Advisers Act of 1940, symbolizing the intention of government to intervene more fully than ever before into the economic life of the nation.

The American Stock Exchange

Located only blocks from the New York Stock Exchange, the American Stock Exchange (AMEX), which was founded during the 1790s, is the stock market for small companies and small investors. The stock issues of organizations that do not meet the listing and size requirements of the NYSE are commonly traded on the AMEX. Once known as the "New York Curb Exchange" because dealers traded on the street outside brokerage houses in the New York financial district, the AMEX moved indoors in 1921.

Trading on the AMEX reached new heights as the 1990s drew to a close. Average daily trading volume was a record 29 million shares in 1998, up from the previous high of 24.4 million set only a few years earlier. More than 7.3 billion shares changed hands on the AMEX in 1998, up from 6.1 billion a year earlier. By 2000, the number of shares traded on the AMEX had reached 13.318 billion. On the NYSE, by contrast, 307.5 billion shares valued at $10.5 trillion changed hands in 2001, an increase of 17 percent over the 262.5 billion shares traded in 2000.

The National Association of Securities Dealers

In addition to organized exchanges, where brokers and dealers quoted prices on shares of stock, an Over-The-Counter (OTC) market had existed since the 1870s. Congress exerted control over the OTC market with passage of the Maloney Act of 1937, which created the National Association of Securities Dealers (NASD). Since its inception, the NASD has traded the shares of companies not large enough to be included on the New York Stock Exchange, the American Stock Exchange, or one of the other regional exchanges. In 1971 the NASD developed the National Association of Securities Dealers Automated Quotations (NASDAQ), becoming the first exchange to use computers to conduct business.

The volume of shares traded made the NASDAQ the largest stock exchange in the world at the end of the 1990s, with a record 202 billion shares changing hands in 1998 alone. Yet, the market value of the NASDAQ, a mere $2.6 trillion in 1998, paled by comparison to the market value of the NYSE, which totaled a staggering $10.9 trillion.

The Dow Jones Industrial Average

The principal index for assessing the performance of the stock market, the Dow Jones Industrial Average, dates from 1893 and at present includes thirty NYSE blue-chip stocks chosen by the editors of the Wall Street Journal. The blue-chips are comparatively safe investments with a low yield and a high price per share, but are issued by companies with a long history of good management and steady profits. Included among the blue-chips are the Aluminum Company of America (Alcoa), American Express, AT&T, Coca-Cola, Eastman Kodak, General Electric, General Motors, IBM, McDonald's, Philip Morris, Proctor and Gamble, Wal-Mart, and Walt Disney.

Bulls and Bears

Until the early 1980s, market analysts heralded the arrival of a "Bull" market when the Dow Jones Industrial Average reached 1,000 points. In a "Bull" market, the price per share rises and investors buy now intending to resale later at a handsome profit. A "Bear" market, by contrast, produces lower share prices; investors sell stocks or bonds intending to repurchase them later at a lower price. The Dow surpassed the 1,000 mark for the first time in 1972. A decade later it reached the unprecedented 2,000 mark before crashing on "Black Monday," 19 October 1987, when it plummeted more than 500 points in a single day and lost 22 percent of its value.

Riding the Bull: The Stock Market in the 1990s

During the 1990s the performance of the stock market was erratic. On 17 April 1991, the Dow Jones Industrial Average closed above 3,000 points for the first time in history. By 1995 the Dow had gained 33.5 percent in value and passed the 4,000 mark. In 1997 the Dow reached a high of 8,000, but began to fluctuate more wildly and unpredictably. In late October 1997, for instance, the stock market came as close to crashing as it had in a decade, when the Dow fell a record 554 points in a single day, equaling 7.2 percent of its total value, only to re-bound with a record 337-point rise the following day. At the end of the week, the market had ebbed and flowed its way to a mark of 7,442.08, the loss of a mere 4 percent in value.

Even when the Dow fell, the value of stocks remained far greater than it had been at the beginning of the decade. By 1998 the Dow had reached 9,000; it closed the century near 11,000 with no apparent limits on its ascent. But analysts could not predict how the market would perform over the short or the long term. Although the market continued to rise steadily, and at times dramatically after 1997, by the end of the decade many experts feared that its volatility suggested the bottom could drop out at any moment.

The Growth of the Stock Market

The unparalleled rise in stock values attracted hundreds of thousands of new investors. By 1997 more than 42 percent of all American families owned stock either directly or through pension plans and mutual funds. Easier access to stock trading through Internet brokerages, which enabled investors to trade stocks without a broker for commissions as low as $5 per trade, added significantly to the numbers of those who ventured into the market. By 1999 more than 6.3 million households in the United States had on-line trading accounts, with assets totaling $400 billion. The popularity of on-line trading encouraged people to conduct more transactions, and to buy and sell more quickly in order to take advantage of short-term changes in the market.

During the 1990s the percentage of wealth invested in the stock market grew at an alarming rate. As recently as 1990, Americans had entrusted only 16 percent of their wealth to the stock market. Even during the "Bull" market of the 1980s, the portion of income devoted to securities never exceeded 19 percent. At the end of the twentieth century, by contrast, stock investments composed a record 34 percent of Americans' aggregate wealth, amounting to more than the value of their homes. A prolonged decline in stocks would thus prove cataclysmic for the millions who relied on the market to ensure their financial welfare now and in the future.

Permanent Prosperity?

Market analysts, nevertheless, remained optimistic. Many looked forward to an endlessly prosperous future, believing that the American economy had undergone a fundamental structural change. The advent of information technology, the global market, and world peace promised to generate unprecedented corporate earnings and continually rising stock prices. Those who shared this perspective postulated a "long boom" that would carry the American economy past all the difficulties and limitations that had hampered it in the past.

By the end of 2000, however, a series of government reports disclosed surprising weaknesses in the economy, giving rise to speculation that the eight-year period of uninterrupted growth was about to come to an end. In response to rumors of a general economic slowdown, the stock market fell. By 21 December 2000, the NASDAQ Index, dominated by high-tech stocks, had lost nearly half of its value, declining to 2,332.78. The Dow Jones Industrial Average held steadier, closing above 10,600 points, but by the end of the year optimism on Wall Street had evaporated amid apprehension over corporate earnings that were lower than expected. Stock prices tumbled, losing approximately $1 trillion in just a few months. Throughout 2001 and 2002, especially after the terrorist attacks of 11 September 2001, economists were concerned that the continued decline in stock values would trigger a reduction in capital investment and consumer spending, the two forces that had sustained the economic boom of the 1990s.

In the wake of corporate scandals and the resultant loss of public confidence, the stock market plummeted during the second quarter of 2002. After reaching its peak in January 2000, the Dow lost 34 percent of its value over the next two-and-one-half years. During the same period, the NASDAQ composite plunged 75 percent, the worst decline for a major index since the Great Depression. The market subsequently rallied, but few analysts were willing to predict what would happen next during one of the most volatile periods in the history of the market.

BIBLIOGRAPHY

Friedman, Milton, and Anna J. Schwartz. The Great Contraction, 1929–1933. Princeton, N.J.: Princeton University Press, 1965.

Galbraith, John Kenneth. The Great Crash. Reprint ed. Boston: Mariner Books, 1997.

Geisst, Charles R. Wall Street: A History. New York: Oxford University Press, 1999.

Longman, Philip J. "Is Prosperity Permanent?" U.S. News & World Report 123 (November 10, 1997): 36–39.

Parrish, Michael E. Securities Regulation and the New Deal. New Haven, Conn.: Yale University Press, 1970.

Seligman, Joel. The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance. Rev. ed. Boston: Northeastern University Press, 1995.

Sobel, Robert. AMEX: A History of the American Stock Exchange. Frederick, Md.: The Beard Group, 2000.

———. The Big Board: A History of the New York Stock Exchange. Frederick, Md.: The Beard Group, 2000.

White, Eugene N. "The Stock Market Boom and Crash Revisited." Journal of Economic Perspectives (Spring 1990): 67–83.

Mark G.Malvasi

See alsoWall Street .

TV Dinner

TV dinners are frozen trays of pre-cooked food. Also known as frozen dinners, they are assembled automatically on a conveyor system. In this process, the food is initially prepared and cooked. It is then placed on the trays and rapidly frozen. The concept of a frozen dinner was first made popular in the 1950s. With the increased use of microwave cooking, frozen dinners have become a large part of the grocery market. They generate over $4.5 billion in sales each year and that number continues to grow.

History

The development of the TV dinner traces its history back to the origin of the technology for freezing food for later use. The practice of freezing food has been known for centuries. No doubt, this technology was discovered accidently by people living in cold climates such as the Arctic. However, it was not until the nineteenth century that any real commercial use of frozen food technology was known. The earliest commercial attempts at producing frozen food were centered on meats. One of the first patents related to freezing food was issued to H. Benjamin in 1842. Later in 1861, a U.S. patent was issued to Enoch Piper for a method of freezing fish. The incidence of frozen food became much more widespread later in the century with the advent of mechanical refrigerators. In 1861, the first meat freezing plant was established in Sydney, Australia. One of the first successful shipments of frozen meats occurred in 1869.

Success in the frozen beef market prompted food manufacturers to develop freezing methods for other food types. One method was the "cold-pack" process that was used around 1905. This early technology was based on a process called slow freezing. In this method, food was processed and then put into large containers. The containers were put in low-temperature storage rooms and allowed to stay there until frozen solid. This could take anywhere from one to three days. Unfortunately, this technique had two significant drawbacks. First, for some products like vegetables, freezing was too slow. The vegetable's center would start to spoil before it was frozen. Second, during freezing large ice crystals would be produced throughout the food. This lead to a break down in the food structure, and when it was thawed, the taste and appearance became undesirable.

Clarence Birdseye improved on this process when he developed a quick-freezing method. During the early 1900s, Birdseye worked for the U.S. government as a naturalist. Stationed in the Arctic, he had the opportunity to see how native Americans preserved their food during the winter. They used a combination of ice, low temperatures, and wind to instantly and thoroughly freeze fish. When this fish was thawed, it looked and tasted as good as if it were fresh. Birdseye returned from the Arctic and adapted this technology for commercial use. By using his method, Birdseye was able to reduce the time it took to freeze food from three days to a few minutes. He perfected the method and in 1924 began the Birdseye Seafoods company.

The product was a success and he turned his attention to methods for freezing different types of foods. In 1930, after years of development, he patented a flash-freezing system that packed meat, fish or vegetables in waxed-cardboard containers. He helped get these products in the grocery stores by codeveloping refrigerated grocery display cases in 1934. Since freezers were not widely available to consumers, this product did not succeed immediately. However, in 1945 airlines began to serve frozen meals. In the early 1950s freezer technology had advanced to the point that people could afford to have them in their houses. This led to the introduction of TV dinners in 1954. Since this time, they have been a convenient alternative to homemade meals.

Background

TV dinners represent a unique adaptation of frozen food technology. Most foods will spoil over time depending on storage conditions. This degradation is the result of natural chemical reactions and microbial growth. People discovered that food could be made to last longer was by freezing it. When food is frozen, the food-spoiling chemical reactions like oxidation by enzymes are slowed. Also, the growth of microorganisms such as bacteria and mold is stopped because these organisms cannot flourish in the cold temperatures. Since the process does not kill all microorganisms, those that survive a reactivated when the food is thawed.

While frozen foods resemble fresh food more closely than food preserved by other techniques, they do undergo some changes. The freezing process causes ice crystals to form throughout the product. These crystals cause a certain amount of degradation in texture and taste by disrupting the cell structure of the food. This problem was significantly reduced by the development of the quick-freezing method which produced much smaller ice crystals.

Not all foods are suitable to be frozen, particularly vegetables. For example, of the thousands of different types of peas that are available, only a few varieties produce a good tasting frozen product. A large amount of research has been done to determine exactly the types of food that are usable. It has been found that most meats, fish, and poultry can be frozen. However, certain meats and fish that are high in fat content tend to breakdown slowly even when frozen. This limits the shelf life.

Design

TV dinners are popular for a variety of reasons such as convenience, quality, and ease of preparation. One of the greatest appeal of frozen dinners is that they are so easy to prepare. In fact, people who are not good cooks can enjoy nearly any type of dinner they want. Typically, all that is necessary is for them to heat up the product in the oven or microwave. These products require little preparation. Today, there are thousands of different types of frozen dinner products on the market, and more products are being introduced each day. The earliest TV dinners included a meat product, potatoes and a vegetable and a dessert. This has been expanded to include pasta dinners, oriental dinners, ethnic and specialty plate dinners. There are also special dinners for people who are watching their weight.

The types of food sold in TV dinners has become quite varied. Different types of meats include beef, chicken, turkey, and even sausage. Any number of vegetable dishes can include peas, corn, broccoli, and cauliflower. Mashed, whipped, and baked potatoes can be included. Pasta dishes, such as lasagne, spaghetti, linguini, or fettuccini, can make up the whole TV dinner. Typically, desserts like apple strudel or cranberry sauce are also included.

A distinguishing characteristic of a TV dinner is the partitioned plate container in which it is sold. The first TV dinners used aluminum trays covered with cardboard. While they are still used, these types of trays have given way to plastic and paper trays which are more compatible with the microwave. The food is arranged in the different compartments to keep everything separate. Dinners that are designed for home consumption are generally sold in sizes ranging from 10 oz to 1 lb (0.28 - 0.45 kg).

Preparation can be done either in a microwave or conventional oven. The disadvantage to microwave cooking is that the meats do not get the baked texture. Everything tends to be a bit soggy. However, ovens take much longer to cook than microwaves.

Raw Materials

The primary raw materials used in the production of TV dinners are the food ingredients. To ensure good quality TV dinners, only high quality food is used. Depending on the variety of the TV dinner, this generally includes meats, potatoes, vegetables, fruits, or pasta. Since tv dinners are prepared foods other ingredients are also needed. This includes such materials as flour, water, and eggs. Flavoring ingredients such as salt, sugar, onion powder, pepper and various spices help improve taste. Artificial colorants are used to improve appearance. A preservative like sodium benzoate is also added to maintain quality during storage.

Since TV dinners are a frozen product, it is imperative that the raw materials are available at the appropriate time. For certain manufacturers, harvesting is scheduled to take place at the same time so the maximum amount of food raw materials can be utilized in the minimum amount of time. Most frozen vegetables and fruits are prepared and frozen within four hours after harvesting.

For making the cartons, various materials such as aluminum, cardboard, paperboard, and plastic is used. These are typically provided prefabricated to the TV dinner manufacturer. They are made by typical molding processes. The carton also contains the printed labels and directions. This is also typically done by contract manufacturers and shipped to the TV dinner maker.

The Manufacturing
Process

The process for producing TV dinners is highly automated. It can be broken down into three stages. First the food is processed and prepared. Next, it is loaded into the packaging and then frozen.

Food preparation

• 1 The first step in the process involves the processing of the incoming food. Depending on the type of food, this will mean different things. For vegetables and fruits, they are placed on a movable conveyor belt and washed. They are then put into a container and steamed or boiled for one to three minutes. This process, known as blanching, helps destroy enzymes in the food that can cause the chemical changes that negatively affect flavor and color. Before meats can be cooked, they are trimmed of fat and cut into appropriate sizes. Fish is cleaned, scaled and cut into fillets. Poultry is thoroughly washed and dressed.
• 2 Next, the different food dishes are prepared in large quantities. Meat is flavored, seasoned, and put on trays. It is then cooked in an oven for a predetermined amount of time. Vegetables may be further steamed or boiled, and mixed with flavoring ingredients. Potatoes are typically whipped in large, stainless steel containers. Other ingredients called for in the recipe are added and then they are cooked. When this step is complete, all of the food is cooked and ready to be packaged. It is then sent to the filling lines.

Tray loading

• 3 Trays are put at the beginning of the filling line and the conveyor system is started. As the trays pass under various filling machines, food is placed in the compartments. The amount of food placed on the tray is strictly regulated by the filling devices. This ensures that every TV dinner gets exactly the same amount of food.
• 4 After a tray is completely filled with food, it next moves to the packaging station. Here, dinners are covered with either aluminum foil, paper or some other topping. The food is packed tightly and a partial vacuum is created to ensure that the container is airtight and no evaporation takes place. Evaporation can have a variety of negative effects. For example, it can cause food to dry out. It can also allow package ice to form which can result in freezer burn giving food a dull, dried-out appearance.

Freezing and shipping

• 5 From the tray loading station the dinners are moved to the freezing units. Today, most manufacturers use one of three rapid freezing methods: cold air blast, direct liquid immersion and indirect contact with refrigerated plates. For TV dinners, the cold air blast method is most often used. In this freezing technique, the trays are carried into a freeze tunnel and passed through a series of refrigerated coils. Fans inside the freeze tunnel blow cold air around the trays. Since the temperature can get as low as -75° F (-59° C) the dinners freeze instantly.
• 6 As the dinners exit the freezers, they are stacked and put into cardboard cases. These cases are put onto pallets and placed in a refrigerated storage facility. They are then transported in a refrigerated truck and stored in the grocers freezer. Good quality food that is prepared properly and frozen will remain in nearly perfect condition if it is kept at 0° F (-18° C) during shipping and storage.

Quality Control

In the United States, quality control is a highly regulated and important aspect of every food processing facility. For health and safety reasons the government sets strict guidelines for minimum food quality. Meat is particularly well regulated because there can represent a significant health risk if poor quality meat is used. Quality control begins with the receipt of raw materials. They are checked to make sure characteristics such as pH, odor, taste, moisture content and appearance are within accepted standards. Next, the processing equipment is sterilized and checked for microorganisms before manufacture begins. While the food is processed, it is tasted and analyzed to make sure the ingredients are put in at the proper proportions. During the filling process, quality control workers are stationed at various points of the production line. At the filling section, they ensure that each compartment is filled correctly. At the end of the filling line, workers watch to make sure that each tray is set before it is covered.

Future

Future improvements in TV dinner manufacture will focus on improving quality, speeding production, and increasing sales. A recent development has been the application of cryogenic freezing methods. This is a super fast freezing method that has allowed the utilization of foods that had previously been unsuitable for freezing. This method is also thought to produce a better tasting product. In addition to new freezing methods, new packaging materials will be used. Manufacturers are constantly trying to solve the problems associated with microwave heating. They have introduced special trays that give meat a baked texture. There may also be trays that allow some components to be heated while other remain cool.

Where to Learn More

Books

Bald, W.B. and A. Robards, ed. Food Freezing Today and Tomorrow. New York: Springer-Verlag, 1991.

Erickson, M. and Y. Hung. Quality in Frozen Food. New York: Chapman and Hall, 1997.

Macrae, R., et al., ed. Encyclopedia of Food Science, Food Technology and Nutrition. San Diego: Academic Press, 1993.

Mallett, C.P. Frozen Food Technology. New York: Routledge, 1993.

—PerryRomanowski

Stock Market

The term "stock market" refers to a large number of markets worldwide in which shares of stock are bought and sold. In 1999 there were 142 such markets in major cities around the world, where hundreds of millions of shares of stock changed hands daily.

Some stock trading takes place in traditional markets, where representatives of buyers and sellers meet on a trading floor to bid on and sell stocks. The stocks traded in these markets are sold to the highest bidder by auction. Increasingly, however, stocks are traded in markets that have no physical trading floor, but are bought or sold electronically.

Electronic stock trading involves networks of computers and/or telephones used to link brokers. Stock price is determined by negotiation between representatives of buyers and sellers, rather than by auction. Hence, these markets are called "negotiated markets." All the stock exchanges around the world, including auction markets at centralized locations and electronic negotiated markets, are collectively called the stock market.

Shares of stock are the basic elements bought and sold in the stock market. In order to raise working capital, a company may offer for sale to the public "shares" or "portions of ownership" in the company. These shares are represented by a certificate stating that the individual owns a given number of shares. Revenue from this initial public offering of stock goes to the issuing corporation.

Investors buy stock hoping that its value will increase. If it does, the shareholder may sell the stock at a profit. If the stock price declines, selling the stock results in a loss for the stockholder. The issuing company does not receive any income when stocks are traded after the initial public offering.

The Price of Stocks

A stock is worth whatever a buyer will pay for it. Because stock market prices reflect the varying opinions and perceptions of millions of traders each day, it is sometimes difficult to pinpoint why a certain stock rises or falls in price. A wide range of factors affects stock prices. These may include the company's actual or perceived performance, overall economic climate and market conditions, philosophy and image projected by the firm's corporate management, political action around the world, the death of a powerful world leader, a change in interest rates, and many other influences.

Investors bid on a stock if they believe it is a good value for the current price. If there are more buyers than sellers, the price of the stock rises. When investors collectively stop buying a given stock or begin selling the stock from their portfolios, the stock price falls.

Understanding Stock Tables

Perceptions of a stock's value are further shaped by information that is available in the financial press, at financial web sites, and from brokers either online or in person. Most major newspapers print this information in stock tables. Some stock charts are printed daily; others contain weekly or quarterly summaries of trading activity.

Because each stock table reports data from only one stock exchange, many sources print more than one table. Although the format varies, most stock tables contain, at a minimum, certain important figures.

The high and low prices for the stock during the last 52 weeks, shown in the first two columns of the table above, are indicators of the volatility of the stock. Volatility is a measure of risk. The more a stock's price varies over a short time, the more potential there is to make or lose money trading that stock.

Although the prices of all stocks go up and down with market fluctuations, some stocks tend to rise more quickly and fall more sharply than the overall market. Other stocks generally move up and down more slowly than the market as a whole.

In the United States, stock prices are traditionally reported in eighths, sixteenths, or even thirty-seconds of a dollar.* This practice dates from the time when early settlers cut European coins into pieces to use as currency. Goodrich's 52-week high of 45¼ in the above example means the highest trading price for this stock in the last year was $45.25.

*Stock exchanges are increasingly moving to decimal notation.

The third column in the table holds an abbreviated name for the stock's issuing corporation. Some financial papers also print the ticker symbol, a very short code name for the company. Brokers often use ticker symbols when ordering or selling stock. Ticker symbols are abbreviated names; for example, "GM" is used for General Motors or "INTC" for Intel, depending on which stock market exchange is being consulted.

The total cash dividend per share paid by the company in the last year is found in the fourth column of the table. The company's board of directors determines the size and frequency of dividends. Traditionally, only older and more mature companies pay dividends, whereas smaller, new companies tend to reinvest profits to finance continued growth. Some dividends are paid in the form of additional stock given to shareholders rather than in cash. Stock tables do not report the value of these non-cash dividends.

The dividend-to-price ratio, or yield, is shown in the table's fifth column. This is the annual cash dividend per share divided by the current price of the stock and is expressed as a percentage. In this example, Goodrich's closing stock price of $27.50 divided into the annual dividend of $1.10 shows

a current yield of 4 percent. Yield can be used to compare income from a particular stock with income from other investments. It does not reflect the gain or loss realized if the stock is sold.

The price-to-earnings ratio (P/E ratio) is the price of the stock divided by the company's earnings per share for the last twelve months. A P/E ratio of 18 means that the closing price of a given stock was eighteen times the amount per share that the firm earned in the preceding twelve months.

Volume in a stock table is the total number of shares traded in the reported period. Daily volumes are usually reported in hundreds. This chart shows a trading volume of 195,300 shares of Goodrich stock. Unusually high volumes can indicate either that investors are enthusiastic about a stock and likely to bid it up, or that wary stockholders are selling their holdings.

The next three columns show the high, low, and closing price for a particular trading period, such as a day or a week. The final column reports the net change in price since the last reporting period. In this daily chart, the closing price for Goodrich stock was 1¾ ($1.75) lower than the previous day's close, whereas Goodyear closed of a dollar ($0.6875) higher.

Stock Exchanges

The New York Stock Exchange, sometimes called the "Big Board," is the largest and oldest auction stock market in the United States. Organized in 1792, it is a traditional market, where representatives of buyers and sellers meet face to face. More than 3,000 of the largest and most prestigious companies in the United States had stocks listed for sale on the NYSE in early 2000, and it is not unusual for a billion shares of stock to change hands daily, making it by far the busiest traditional market in the world.

Requirements for a corporation to list its stock on the NYSE are stringent. They include having at least 1.1 million publicly traded shares of stock, with an initial offering value of at least 40 million dollars. The American Stock Exchange (AMEX) in New York and several regional stock exchanges are traditional markets with less stringent listing requirements.

The NASDAQ is an advanced telecommunications and computer-based stock market that has no centralized location and no single trading floor. However, more shares trade daily on the NASDAQ than on any other U.S. exchange. The NASDAQ is a negotiated market, rather than an auction market. Nearly 5,000 companies had stocks listed on the NASDAQ in 1999. Companies listing on the NASDAQ range from relatively small firms to large corporations such as Microsoft, Intel, and Dell.

Stocks not listed on any of the exchanges are traded over the counter (OTC). They are bought and sold online or through brokers. These are generally stocks from smaller or newer companies than those listed on the exchanges. Stocks in about 11,000 companies are traded in the OTC market.

Stock Market Indexes

A large number of indexes, or summaries of stock market activity, track and report stock market fluctuations. The most widely known and frequently quoted index is the Dow Jones Industrial Average (DJIA). The DJIA is an adjusted average of the change in price of thirty major industrial stocks listed on the NYSE.

Another widely used stock market index is the Standard and Poor's 500 (S&P 500). It measures performance of stocks in 400 industrial, 20 transportation, 40 utility, and 40 financial corporations listed on the NYSE, AMEX, and NASDAQ. Because of this, many analysts feel that the S&P 500 gives a much broader picture of the stock market than does the Dow Jones.

Indexes for the NASDAQ and AMEX track the performance of stocks listed on those exchanges. Lesser known indexes monitor specific sectors of the market (transportation or utilities, for example). The Wall Street Journal publishes twenty-nine different stock market indexes each day.

see also Economic Indicators.

John R. Wood and

Alice Romberg Wood

Bibliography

Case, Samuel. The First Book of Investing. Rocklin, CA: Prima Publishing, 1999.

Dowd, Merle E. Wall Street Made Simple. New York: Doubleday, 1992.

Morris, Kenneth M., and Virginia B. Morris. Guide to Understanding Money & Investing. New York: Lightbulb Press, 1999.

UNPRECEDENTED CLOSURES OF FINANCIAL STOCK MARKETS

On Tuesday, September 11, 2001, terrorist assaults demolished the World Trade Center in New York City and damaged the Pentagon in Washington, D.C. These attacks on the structure of the U.S. financial and governmental systems led to the closing of the U.S. stock markets, including the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX).

These financial stock exchanges reopened the following Monday after remaining shut down for the longest period of time since 1929.

Stock Market

What It Means

Stock market is a term referring to a place where buyers and sellers of stocks come together. It may also be used to refer collectively to all the places in the world, some of which are real buildings and some of which exist mainly in computer networks, where stocks are bought and sold.

A stock is a share of ownership in a company. If you buy one share of stock in Wal-Mart, you literally own one tiny portion of that enormous company. As a shareholder in Wal-Mart, you can expect to profit as the company profits, because your stock will most likely increase in value when the company performs well. But your stock also stands to lose value when Wal-Mart does not perform well. Based on your predictions about how Wal-Mart will perform in the future, you may want to buy more stock in Wal-Mart to make more money or sell your stock in Wal-Mart to avoid losing money. To buy or sell your Wal-Mart stock, you might contact a stockbroker (someone authorized to place orders for the purchase and sale of stocks) by phone, and the broker would then forward your order to someone who would carry out the transaction on the floor of the New York Stock Exchange (NYSE), located on Wall Street in New York City, where stock in the largest American companies is bought and sold.

There are numerous other regional stock exchanges in the United States, but the most prominent domestic stock exchange other than the NYSE is the NASDAQ, a virtual exchange (this means that all trading is done by computer) specializing in smaller U.S. companies. There are, additionally, stock exchanges in all developed countries and in many developing countries. In addition to the NYSE and the NASDAQ, the world’s largest stock exchanges are in the United Kingdom, Japan, France, Germany, and India.

When Did It Begin

The first phenomena resembling stock markets probably arose in thirteenth–fifteenth century Italy, when leading citizens of city-states like Venice, Florence, and Genoa were forced to pay a portion of the debt incurred by local governments and the Catholic Church in their efforts to provide for defense and the maintenance of trade routes. These shares of debt collected interest (a fee paid to someone who loans money to someone else), and because of this, the owners of shares could expect to make a profit. Shares in the public debt therefore acquired value, and the governing authorities allowed people to buy and sell these shares. The government and Church were providing people with a way to make money at the same time that those people were paying the institutions’ debts; thus, an effective way of financing large projects was discovered.

This model was later adopted by businesses who wanted to raise money for expansion and other pricey ventures. In 1602 the Dutch East India Company not only decided to sell stock in its company, it created for that purpose what is generally considered the world’s first continuously operating stock market, the Amsterdam Stock Exchange. Once the value of stocks in the Dutch East India Company became widely recognized, stockholders could use their shares as collateral for loans. (Collateral is any item or items of value that you offer as proof of your ability to repay a loan.) This gave rise to many of the financial intricacies of present-day stock trading, such as options and derivatives, which are essentially complex ways of buying stock, and accordingly to the specialized investors that characterize developed stock markets.

The forerunner to the New York Stock Exchange was created in 1792, when 24 brokers agreed to deal only with one another in the buying and selling of the U.S. government’s debt. The London Stock Exchange came into being in 1801 and became the world’s largest and most important stock market. It was instrumental in raising the capital necessary for England to defeat Napoleon, the French leader who attempted to conquer much of Europe in the early nineteenth century, and many countries attempted to copy the London exchange’s success. Stock markets appeared in most European capitals or other large cities. World War I (1914–17) brought about declines in the European stock markets, while the NYSE expanded in the following years. This growth slowed dramatically in 1929, when a stock market crash signaled the beginning of the Great Depression.

More Detailed Information

The need to raise money to pay for business ventures remains a principle reason for a company to sell stock, and the promise of large increases in the value of a stock is the primary reason for an individual or institution to buy stock. The stock market is a crucial factor in economic growth on a large scale, because it allows businesses to grow more rapidly than they could if they were funded privately, and because it allows investors to make larger amounts of money than they could by placing their money in bank accounts.

For a business to be listed (to have its stock made available for trading) on a stock exchange, it has to meet certain requirements. Each stock exchange establishes its own requirements, usually relating to a business’s financial soundness and the amount of capital (money and other assets) that it has, and when a company meets these requirements, it can choose to go public on one of the world’s stock exchanges. Going public refers to the transition that a business makes from being a privately owned organization to being a business owned by the public, or stockholders. When a company makes its stock available for purchase for the first time, this is called an initial public offering (IPO). Once it has sold all shares of its stock, a business has access to the money raised in this process. The leaders of the company are no longer answerable only to themselves at this point. They must answer to shareholders, the true owners of the company.

In the stock market prices fluctuate according to the law of supply and demand. As demand for a stock increases, its price increases, and vice versa. Demand is created or lessened for a stock, of course, when a company is known to be profitable or known to be struggling. Demand can additionally be affected based on any positive or negative news about a stock. Stock markets are thus vulnerable to human psychology. For instance, when large numbers of people get enthusiastic about a stock and decide to buy it, they can greatly inflate the stock price in a short period of time.

Sometimes the price of a stock rises so high that it loses its correlation to company earnings. This happened on a large scale in the late 1920s and also in the late 1990s. The 1929 stock market crash, like the lesser and more gradual crash that occurred in 2001–02, started when investors widely understood that the inflated value of stock prices could not last. Investors sold off stocks in large numbers, stock prices dropped across the market, and many people who had invested heavily in stocks lost a great deal of money.

While the stock market offers investors the potential to multiply their money more quickly than they might be able to do by other means, it is also inherently risky. Most financial professionals advise investors to resist the temptation to make quick profits. Those who invest with an eye toward long-term profit often balance investment in risky stocks (frequently these are stocks in untested companies, or companies specializing in new technologies) with investment in larger companies less subject to volatility. Since World War II the U.S. stock market has increased in value by an average of 10 percent a year, in spite of dramatic fluctuations from year to year and decade to decade.

People are still able to invest in government debt as well. They do so usually by buying items commonly called government bonds, which are traded not in the stock market but in the bond market. The bond market includes other types of bonds in addition to government bonds and works in a similar way to stock markets. One key difference between stocks and government bonds is that the value of government bonds is largely risk-free, meaning that as long as the issuing country itself continues to exist and is not in a severe financial crisis, the bondholder can expect repayment. Bonds can generally be expected to increase in value at a steady rate, but they are unable to match the explosive growth sometimes offered by stocks.

Recent Trends

A period of sustained stock-price increases is called a bull market. During bull markets, investors make money rapidly. Between 1991 and 2000, the United States experienced the longest and most vigorous bull market in its history.

The performance of the U.S. stock market is most frequently measured according to the Dow Jones Industrial Average, a statistic that conveys the combined stock prices of the 30 top companies in the country. In 1991 the Dow, as it is commonly called, reached the 3000-point mark for the first time in its history. By 1995 the Dow had passed 4000 points, and by 1998 it had surpassed the 9000-point mark. In 2000 the Dow peaked at more than 11,700 points, and many analysts seemed to think that, despite the unprecedented growth of the stock market over the decade, the bull market might go on forever.

However, a number of unforeseen factors, including irrational inflation of stocks in technology companies and unethical accounting practices that made some companies appear to be more profitable than they really were, triggered large-scale declines in the stock market beginning in 2000. The already vulnerable economy received another tremendous blow with the terrorist attacks of September 11, 2001, which forced the New York Stock Exchange to close for six days (the longest closure since the Great Depression) and which further undermined investor confidence in the stock market. These conditions created what is called a bear market, or a period during which stock prices generally decrease. By late 2002 the Dow had returned to pre–1998 levels, bottoming out at 7,286.27. It was not until 2006 that the Dow returned to the level it had reached at its peak in 2000.

STOCK MARKET

The various organized stock exchanges and over-the-counter markets.

The trading of securities such as stocks and bonds is conducted in stock exchanges, which are grouped under the general term stock market. The stock market is an important institution for capitalist countries because it encourages investment in corporate securities,

providing capital for new businesses and income for investors. In the 1990s large numbers of ordinary persons came to own stock through pension funds, deferred employee savings plans, investment clubs, or mutual funds.

The New York Stock Exchange is the oldest (formed in 1792) and largest stock exchange in the United States, but other exchanges operate in many major U.S. cities. The activities of the stock market are closely monitored by the federal securities and exchange commission to prevent the manipulation of stock prices and other activities that lessen investor confidence.

Stock exchanges are private organizations with a limited number of members. Stock brokerage houses generally cannot purchase seats on an exchange. Instead, a member of the firm holds a seat personally. In some cases several partners of a brokerage house will be members of an exchange. The price of a seat fluctuates depending on the state of the economy, but seats on the New York Stock Exchange have sold for more than $1 million.

Some exchange members are specialists in particular types of securities, while others act as agents for other brokers. A small number of brokers who pay an annual fee but are not members also have access to the trading floor.

A stock exchange is essentially a marketplace for stocks and bonds, with stockbrokers earning small commissions on each transaction they make. Stocks that are handled by one or more stock exchanges are called listed stocks. For a corporation's stock to be listed on an exchange, the company must meet certain exchange requirements. Each exchange has its own criteria and standards, but in general a company must show that it has sufficient capital and is in sound financial condition. Once a company is listed, trading in its stock will be suspended if the company's financial condition deteriorates to the point that it no longer meets the exchange's minimum requirements.

When individuals wish to purchase a stock, they place an order with a brokerage house. The broker gets a quotation or price and sends the order to the firm's representative on the floor of the stock exchange. The representative negotiates the sale and notifies the brokerage house. Transactions happen rapidly, and each one is recorded on a computer system and sent immediately to an electronic ticker that displays stock information on a screen. At one time this information was generally only available at stock brokerage houses, but the daily stock ticker is now available on television and through the internet.

New York Stock Exchange transactions may be made in three ways. A cash transaction requires payment and delivery of the stock on the day of purchase. A regular transaction requires payment and delivery of the stock by noon on the third day following a full business day. Around 95 percent of stock is purchased under these terms. Finally, purchase can be made through a seller's option contract, which requires payment and delivery of the stock within any specified time not exceeding 60 days, though seven days is the most common period.

All transactions not made in the stock exchanges take place in over-the-counter (OTC) trading. An OTC transaction is not an auction on the stock exchange floor but a negotiation between a seller and a buyer. Most sales of bonds occur in OTC trading as do most new issues of securities. In the 1980s discount OTC brokerage firms appeared, offering lower commissions on stock transactions for investors who were willing to do more research on their own. By the 1990s these firms had proliferated.

Dealers in OTC trading are not confined just to large cities, as are stock exchanges, but can be found in many locations throughout the United States. In 1971 these firms were linked to an electronic communications system and became the National Association of Securities Dealers Automated Quotations (NASDAQ). By the 1990s NASDAQ had become the second largest U.S. stock market.

During the late 1990s, a number of investors began engaging in a process called "day trading," whereby investors would purchase stock shares and then attempt to sell them quickly thereafter when the prices rose. The phenomenon corresponded with the development of stock trading over the Internet, which allowed individuals to trade stocks through their computers without the need for a stockbroker. Many individuals who traded over the Internet also engaged in day trading. Although day trading has some potential for success, analysts have warned that investments take time to develop in order to be successful. Statistics

showed that only 10 percent of day traders maintained profitable results, and by the early 2000s, it had become clear that this type of trading would likely result in losses for investors.

The health of the U.S. economy is typically measured by the stock market. When stock prices rise and there is a "bull market," U.S. business is assumed to be doing well. When stock prices fall and there is a "bear market," a downturn in business and the economy is assumed.

The stock market suffered through the early 2000s as a number of major events caused the U.S. economy to take a sharp downturn. The september 11th terrorist attacks in 2001 caused the New York Stock Exchange (NYSE) to close for a period of six days, the longest closing since 1933. On Monday, September 17, the Dow Jones Industrial Average suffered its greatest point loss in history after the NYSE reopened following the attacks. The U.S. economy slumped after the attacks, and the stock market continued to struggle through much of 2003.

Scandals involving major U.S. corporations had a similarly crippling effect on the stock market. Several large companies were found to have misstated their earnings through faulty or fraudulent accounting practices. In many of these cases, the companies overstated their profits, misleading their investors. Companies involved in such scandals included Enron Corporation, WorldCom, Adelphia, and Xerox. The scandal involving Enron also led to the conviction of accounting firm Arthur Andersen, L.L.P. for obstructing justice when the firm admitted to destroying thousands of Enron documents.

The scandals have led to widespread mis-trust of the U.S. corporate world. The SEC issued new rules during 2002 and 2003 regarding accounting practices and conflicts of interest among corporate officers in response to the scandals. The rules were designed to regain the trust of the public and investors following the scandals, but the stock market continued to fluctuate throughout much of 2003.

further readings

"Stocks Close Down in Anniversary Week." CBSNews.com. Available online at <www.cbsnews.com/stories/2002/09/23/national/main523025.shtml> (accessed August 8, 2003).

"Wall Street Scandals at a Glance." BBC News. Available online at <www.news.bbc.co.uk/1/hi/business/2066962.stm> (accessed August 8, 2003).

Wright, Russell O. 2002. Chronology of the Stock Market. Jefferson, N.C.: McFarland.

cross-references

Common Stock; Preferred Stock.