A Buying and selling shares
After newly issued shares have been sold (usually by investment bank's) for the first time - this is called the primary market - they can be repeatedly traded at the stock exchange on which the company is listed, on what is called the secondary market. Major stock exchanges, such as New York and London, have a lot of requirements about publishing financial information for shareholders. Most companies use over-the-counter (OTC) markets, such as NASDAQ in New York and the Alternative Investment Market (AIM) in London, which have fewer regulations. The nominal value of a share - the price written on it - is rarely the same as its market price - the price it is currently being traded at on the stock exchange. This can change every minute during trading hours, because it depends on supply and demand - how many sellers and buyers there are. Some stock exchanges have computerized automatic trading systems that match up buyers and sellers. Other markets have market makers: traders in stocks who quote bid (buying) and offer (selling) prices. The spread or difference between these prices is their profit or mark-up. Most customers place their buying and selling orders with a stockbroker, someone who trades with the market makers.
B New share issues
Companies that require further capital can issue new shares. If these are offered to existing shareholders first this is known as a rights issue - because the current shareholders have the first right to buy them. Companies can also choose to capitalize part of their profit or retained earnings. This means turning their profits into capital by issuing new shares to existing shareholders instead of paying them a dividend. There are various names for this process, including scrip issue and bonus issue. Companies with surplus cash can also choose to buy back some of their shares on the secondary market. These are then called own shares.
C Categories of stocks and shares
Investors tend to classify the stocks and shares available in the equity markets in different categories.
· Blue chips: Stocks in large companies with a reputation for quality, reliability and profitability. More than two-thirds of all blue chips in industrialized countries are owned by institutional investors such as insurance companies and pension funds.
· Growth stocks: Stocks that are expected to regularly rise in value. Most technology companies are growth stocks, and don't pay dividends, so the shareholders' equity or owners’ equity increases. This causes the stock price to rise.
· Income stocks: Stocks that have a history of paying consistently high
dividends.
· Defensive stocks: Stocks that provide a regular dividend and stable earnings, but whose value is not expected to rise or fall very much.
· Value stocks: Stocks that investors believe are currently trading for less than they are worth - when compared with the companies' assets.
Ex. 1 Match up the words from A and B.
A:primary, financial, market, trading, surplus, blue, stable;
B:makers, cash, market, earnings, chips, information, hours.
Ex. 2 Find for words in A synonyms in Band antonyms inC.
A: buy, primary, listed, bid, profits, rise;
B: quoted, buying, initial, purchase, grow, earnings;
C: fall, sell, offer, secondary, losses, over-the-counter.
Ex. 3 Ask 5 questions on the content of the text.
Ex. 4 Match the words with their definitions.
to capitalize rights issue market price secondary market
primary market nominal value own shares
1 new shares offered to existing shareholders
2 the price written on a share, which never changes
3 to turn profits into stocks or shares
4 the market on which shares can be re sold
5 the price at which a share is currently being traded
6 shares that companies have bought back from their owners
7 the market on which new shares are sold
Ex. 5 Are the following statements TRUE or FALSE?
1 Stocks that have already been bought at least once are traded on the primary market.
2 NASDAQ and the AIM have more regulations than the New York Stock Exchange and the London Stock exchange.
3 The market price of stocks depends on how many buyers and sellers there are.
4 Automatic trading systems do not require market makers.
5 Market makers make a profit from the difference between their bid and offer prices.
Ex. 6 Complete the sentences. Look at B and C to help you.
1 A stock whose price has suddenly fallen a lot after a company had bad news could be a ......................., as it will probably rise again.
2 The stocks of food, tobacco and oil companies are usually ............., as demand doesn't rise or fall very much in periods of economic expansion or contraction.
3 Pension funds and insurance companies, which can't take risks, usually only invest in ................... .
4 The best way to make a profit in the long term is to invest in ……
5 This stock used to be considered an .............., but two years ago the firm started to cut its dividend and reinvest its cash in the business.
6 The financial director announced a forthcoming ................. of new shares to existing shareholders.
7 The company is planning a ................ of one additional share for every three existing shares.
8 We have bought back 200,000 ordinary shares, which increases the value of our ................... to ˆ723,000.
Ex. 7 Comment on the following.
If you had a lot of money to invest in stocks, what kind of stocks would you buy, and why?