3.1 Growth Stocks.

The phrase "growth stock" is widely used as a term to describe what

many investors are looking for. People who are willing to take greater-than-

average risks often invest in what is often called "high-growth"

stocks—stocks of companies that are clearly growing much faster than

average and where the stock commands a premium price in the market. The

rationale is that the company's earnings will continue to grow rapidly for

at least a few more years to a level that justifies the premium price. An

investor should keep in mind that only a small minority of companies really

succeed in making earnings grow rapidly and consistently over any long

period. The potential rewards are high, but the stocks can drop in price at

incredible rates when earnings don't grow as expected. For example, the

companies in the video game industry boomed in the early 1980s, when it

appeared that the whole world was about to turn into one vast video arcade.

But when public interest shifted to personal computers, the companies found

themselves stuck with hundreds of millions of dollars in video game

inventories, and the stock collapsed.

There is less glamour, but also less risk, in what we will call—for

lack of a better phrase—"moderate-growth" stocks. Typically, these might be

stocks that do not sell at premium, but where it appears that the company's

earnings will grow at a faster-than-average rate for its industry. The

trick, of course, is in forecasting which companies really will show better-

than-average growth; but even if the forecast is wrong, the risk should not

be great, assuming that the price was fair to begin with.

There's a broad category of stocks that has no particular name but that

is attractive to many investors, especially those who prefer to stay on the

conservative side. These are stocks of companies that are not glamorous,

but that grow in line with the economy. Some examples are food companies,

beverage companies, paper and packaging manufacturers, retail stores, and

many companies in assorted consumer fields.

As long as the economy is healthy and growing, these companies are

perfectly reasonable investments; and at certain times when everyone is

interested in "glamour" stocks, these "non-glamour" issues may be neglected

and available at bargain prices. Their growth may not be rapid, but it

usually is reasonably consistent. Also, since these companies generally do

not need to plow all their earnings back into the business, they tend to

pay sizable dividends to their stockholders. In addition to the real growth

that these companies achieve, their values should adjust upward over time

in line with inflation—a general advantage of common stocks that is worth

repeating.

3.2 Cyclical Stocks.

These are stocks of companies that do not show any clear growth trend,

but where the stocks fluctuate in line with the business cycle (prosperity

and recession) or some other recognizable pattern. Obviously, one can make

money if he buys these near the bottom of a price cycle and sells near the

top. But the bottoms and tops can be hard to recognize when they occur; and

sometimes, when you think that a stock is near the bottom of a cycle, it

may instead be in a process of long-term decline.

3.3 Special Situations.

There’s a type of investment that professionals usually refer to as

“special situations”. These are cases where some particular corporate

development–perhaps a merger, change of control, sale of property, etc.–

seems likely to raise the value of a stock. Special situation investments

may be less affected by general stock market movements than the average

stock investment; but if the expected development doesn’t occur, an

investor may suffer a loss, sometimes sizable. Here the investor has to

judge the odds of the expected development’s actually coming to pass.

4. PREFERRED STOCKS

A preferred stock is a stock which bears some resemblances to a bond

(see below). A preferred stockholder is entitled to dividends at a

specified rate, and these dividends must be paid before any dividends can

be paid on the company's common stock. In most cases the preferred dividend

is cumulative, which means that if it isn't paid in a given year, it is

owed by the company to the preferred stockholder. If the corporation is

sold or liquidates, the preferred stockholders have a claim on a certain

portion of the assets ahead of the common stockholders. But while a bond is

scheduled to be redeemed by the corporation on a certain "maturity" date, a

preferred stock is ordinarily a permanent part of the corporation's capital

structure. In exchange for receiving an assured dividend, the preferred

stockholder generally does not share in the progress of the company; the

preferred stock is only entitled to the fixed dividend and no more (except

in a small minority of cases where the preferred stock is "participating"

and receives higher dividends on some basis as the company's earnings

grow).

Many preferred stocks are listed for trading on the NYSE and other

exchanges, but they are usually not priced very attractively for individual

buyers. The reason is that for corporations desiring to invest for fixed

income, preferred stocks carry a tax advantage over bonds. As a result,

such corporations generally bid the prices of preferred stocks up above the

price that would have to be paid for a bond providing the same income. For

the individual buyer, a bond may often be a better buy.

4.1 Bonds-Corporate

Unlike a stock, a bond is evidence not of ownership, but of a loan to a

company (or to a government, or to some other organization). It is a debt

obligation. When you buy a corporate bond, you have bought a portion of a

large loan, and your rights are those of a lender. You are entitled to

interest payments at a specified rate, and to repayment of the full "face

amount" of the bond on a specified date. The fixed interest payments are

usually made semiannually. The quality of a corporate bond depends on the

financial strength of the issuing corporation.

Bonds are usually issued in units of $1,000 or $5,000, but bond prices

are quoted on the basis of 100 as "par" value. A bond price of 96 means

that a bond of $1,000 face value is actually selling at $960 And so on.

Many corporate bonds are traded on the NYSE, and newspapers carry a

separate daily table showing bond trading. The major trading in corporate

bonds, however, takes place in large blocks of $100,000 or more traded off

the Exchange by brokers and dealers acting for their own account or for

institutions.

4.2 Bonds-U. S. Government

U.S. Treasury bonds (long-term), notes (intermediate-term) and bills

(short-term), as well as obligations of the various U. S. government

agencies, are traded away from the exchanges in a vast professional market

where the basic unit of trading is often $ 1 million face value in amount.

However, trades are also done in smaller amounts, and you can buy

Treasuries in lots of $5,000 or $10,000 through a regular broker. U. S.

government bonds are regarded as providing investors with the ultimate in

safety.

4.3 Bonds-Municipal

Bonds issued by state and local governments and governmental units are

generally referred to as "municipals" or "tax-exempts", since the income

from these bonds is largely exempt from federal income tax.

Tax-exempt bonds are attractive to individuals in higher tax brackets

and to certain institutions. There are many different issues and the

newspapers generally list only a small number of actively traded

municipals. The trading takes place in a vast, specialized over-the-counter

market. As an offset to the tax advantage, interest rates on these bonds

are generally lower than on U. S. government or corporate bonds. Quality is

usually high, but there are variations according to the financial soundness

of the various states and communities.

4.4 Convertible Securities

A convertible bond (or convertible debenture) is a corporate bond that

can be converted into the company's common stock under certain terms.

Convertible preferred stock carries a similar "conversion privilege". These

securities are intended to combine the reduced risk of a bond or preferred

stock with the advantage of conversion to common stock if the company is

successful. The market price of a convertible security generally represents

a combination of a pure bond price (or a pure preferred stock price) plus a

premium for the conversion privilege. Many convertible issues are listed on

the NYSE and other exchanges, and many others are traded over-the-counter

4.5 Options

An option is a piece of paper that gives you the right to buy or sell a

given security at a specified price for a specified period of time. A

"call" is an option to buy, a "put" is an option to sell. In simplest form,

these have become an extremely popular way to speculate on the expectation

that the price of a stock will go up or down. In recent years a new type of

option has become extremely popular: options related to the various stock

market averages, which let you speculate on the direction of the whole

market rather than on individual stocks. Many trading techniques used by

expert investors are built around options; some of these techniques are

intended to reduce risks rather than for speculation.

4.6 Rights

When a corporation wants to sell new securities to raise additional

capital, it often gives its stockholders rights to buy the new securities

(most often additional shares of stock) at an attractive price. The right

is in the nature of an option to buy, with a very short life. The holder

can use ("exercise") the right or can sell it to someone else. When rights

are issued, they are usually traded (for the short period until they

expire) on the same exchange as the stock or other security to which they

apply.

4.7 Warrants

A warrant resembles a right in that it is issued by a company and gives

the holder the option of buying the stock (or other security) of the

company from the company itself for a specified price. But a warrant has a

longer life—often several years, sometimes without limit As with rights,

warrants are negotiable (meaning that they can be sold by the owner to

someone else), and several warrants are traded on the major exchanges.

4.8 Commodities and Financial Futures

The commodity markets, where foodstuffs and industrial commodities are

traded in vast quantities, are outside the scope of this text. But because

the commodity markets deal in "futures"—that is, contracts for delivery of

a certain good at a specified future date— they have also become the center

of trading for "financial futures", which, by any logical definition, are

not commodities at all.

Financial futures are relatively new, but they have rapidly zoomed in

importance and in trading activity. Like options, the futures can be used

for protective purposes as well as for speculation. Making the most

headlines have been stock index futures, which permit investors to

speculate on the future direction of the stock market averages. Two other

types of financial futures are also of great importance: interest rate

futures, which are based primarily on the prices of U.S. Treasury bonds,

notes, and bills, and which fluctuate according to the level of interest

rates; and foreign currency futures, which are based on the exchange rates

between foreign currencies and the U.S. dollar. Although, futures can be

used for protective purposes, they are generally a highly speculative area

intended for professionals and other expert investors.

5. STOCK MARKET AVERAGES READING THE NEWSPAPER QUOTATIONS

The financial pages of the newspaper are mystery to many people. But

dramatic movements in the stock market often make the front page. In

newspaper headlines, TV news summaries, and elsewhere, almost everyone has

been exposed to the stock market averages.

In a brokerage firm office, it’s common to hear the question “How’s the

market?” and answer, “Up five dollars”, or “Down a dollar”. With 1500

common stocks listed on the NYSE, there has to be some easy way to express

the price trend of the day. Market averages are a way of summarizing that

information.

Despite all competition, the popularity crown still does to an average

that has some of the qualities of an antique–the Dow Jones Industrial

Average, an average of 30 prominent stocks dating back to the 1890s. This

average is named for Charles Dow–one of the earliest stock market

theorists, and a founder of Dow Jones & Company, a leading financial news

service and publisher of the Wall Street Journal.

In the days before computers, an average of 30 stocks was perhaps as

much as anyone could calculate on a practical basis at intervals throughout

the day. Now, the Standard & Poor’s 500 Stock Index (500 leading stocks)

and the New York Stock Exchange Composite Index (all stocks on the NYSE)

provide a much more accurate picture of the total market. The professionals

are likely to focus their attention on these “broad” market indexes. But

old habits die slowly, and someone calls out, “How’s the market?” and

someone else answers, “Up five dollars,” or “Up five”–it’s still the Dow

Jones Industrial Average (the “Dow” for short) that they’re talking about.

The importance of daily changes in the averages will be clear if you

view them in percentage terms. When the market is not changing rapidly, the

normal daily change is less than Ѕ of 1%. A change of Ѕ% is still moderate;

1% is large but not extraordinary; 2% is dramatic. From the market

averages, it’s a short step to the thousands of detailed listings of stock

prices and related data that you’ll find in the daily newspaper financial

tables. These tables include complete reports on the previous day’s trading

on the NYSE and other leading exchanges. They can also give you a

surprising amount of extra information.

Some newspapers provide more extensive tables, some less. Since the

Wall Street Journal is available world wide, we’ll use it as a source of

convenient examples. You’ll find a prominent page headed “New York Stock

Exchange Composite Transactions”. This table covers the day’s trading for

all stocks listed on the NYSE. “Composite” means that it also includes

trades in those same stocks on certain other exchanges (Pacific, Midwest,

etc.) where the stocks are “dually listed”. Here are some sample entries:

|52 Weeks | | |Yld |P-E |Sales | | | |Net |

|High |Low |Stock |Div |% |Ratio|100s |High |Low |Close |Chg. |

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