Stock Market Basics
A stock is a security in a written financial instrument than can be executed against a company for the value of the rated stock price. These stock prices are regularly derived by daily indices valuing company operations, holdings, credit rating, and annual and quarterly reports. News announcement and shifts in profit levels can radically alter stock prices. When a company report profits, the issuing of an additional payment to stockholders is made per stocks held. A company can raise capital from the sale price of the stocks to the public. This “shares” the success of the company.
Companies are motivated to offer stock issues to raise money to pay debts, finance expansion, secure more facilities and resources, or fund current operations. Activities on the New York Stock Exchange and transactions of its officers and agents are monitored by the Securities and Exchange Commission.
Block trading of stock regularly occurs by brokers, or qualified licensed agents of banks and financial institutions. Block purchases are often effected to mask interior client purchase of stock. Shares of stock can fluctuate with such volatility even those brokers expert in the trading and assessment of stock values can be taken unaware of sudden shifts in values and resultant impacts of financial markets. Stock holders hold escalating amounts of impact on the direction a company is moving in and can register objections and limit a company’s officers from engaging in activities that stock holders feel will damage the company or render their stocks lesser in value. The potential resale value of a stock is intended to realize a profit superior to investment banking holdings. Stock trading and investment that requires capital outlay also carries more risk.
Futures, or derivatives product, are instruments setting forth conditions of a stock price in the future. The derivative financial product is paid when it “expires”. If a stock is “shorted”, or futures calculated that the price will fall, this purchase is set into the index calculating stock value. If a stock is “bet long”, or futures purchased toward a net gain on a future date, and the expiry date arrives with that result, the issuing bank or institution must pay that obligation. These types of issues can anger stock holders, who want any additional funds the company accesses to flow to payment of stock dividends. Sizable amounts of money have been lost by financial institutions assuming risk without evidence of rationale or recouping circumstances. The trading of mortgage securities in this same manner has resulted in losses of staggering degree by financial institutions not practicing due diligence, or the necessary and contracted subjective analysis of brokered debt.
Banks throughout 1980′s and 1970′s profited wildly from the sale of derivatives because the buyers generally with did not understand what they bought, didn’t know how to value the derivatives, or couldn’t effectively value the futures because they couldn’t substantiate a concrete stock price from company operations, market position or assets and profits. Thus very few demonstrable computations for the future price could be validated. Yet many brokerage houses and bank divisions handling derivatives undertook great risk to enjoy the fees and volumes of currency handling these transactions involved. Customers of many of these “junk” products ended up suing the companies. The pressure to buy stock at a low price and sell at a high price has tempted many into stock market transgressions. The most notable of these are backdating of stock options by corporate officers and distribution of insider information, confidential to a company, to promote stock sales or purchases. The resulting transactions reap profit for a few at the expense of many who otherwise might profit in a perfect exercise of the economic market.