Market Elements

On this page, we start by describing market elements and how they work. We then look a little deeper into how to tell what is going on in them. Finally we list the sources for market info.

Market Functions

A market is the means through which the buyers and sellers are brought together to aid in the transfer of goods and/or services.

In this section, we describe what makes a good market. Then, we talk about the types of assets out there and how they come to life. Then, we talk about exchanges and how they work. Finally, look at broad market trends.

Market Aspects
  • Need not have a real location. Clear records of the details of the transfer is key
  • Market does not own the goods or services involved
  • Can deal in any number of goods and services

There are many markets, but not all are not equal. Some are active and liquid. Others are mainly illiquid and inefficient in their ops.

Traits of Good Markets
  • Timely and correct info on price and volume of past trades and the current bid and ask prices
  • It is liquid, meaning an asset can be bought or sold quickly at a price close to the prices of last trade
  • Trades entail low costs
  • Prices quickly adjust to new info

Primary markets are where new assets are sold while secondary markets are where outstanding assets are bought and sold.

Primary Markets

Government Bond Issues
Treasury Issues are divided based on original maturities
  • Bills have less than one year term
  • Notes have terms from two to ten years
  • Bonds have terms over ten years
Muni Bond Issues

Muni bonds are either general obligation backed by the full taxing power of the city or revenue bonds dependent on the revenue from a single project.

Methods to Sell Munis
  • competitive bid
  • negotiation
  • private placement

The trend is moving more toward negotiated bond issues and shifting toward revenue bonds which comprise 70% of issues.

Corporate Bonds and Stock Issues

Bonds are sold through a negotiated arrangement with an investment banker. A syndicate is put together of other major bankers and a selling group for distribution.

Seasoned new issues are added tranches to outstanding stock in the form of secondary offerings. New stock issues (IPOs) are firms who offering their stock to the public for the first time.

Secondary Markets

Treasuries are traded by bond dealers though primary dealers, usually large investment banks. Muni’s are distributed through banks and investment firms. Corporate bonds either trade on exchanges like stocks or in over-the-counter markets.

Stocks are traded in three segments but there is a major trend for consolidation on the national exchanges across the globe creating a twenty-four hour trading culture.

Exchange Segments
  • National stock exchanges
  • Regional exchanges
  • Over-the counter

Exchange Analysis

Types of Exchange Members
  • specialists
  • commission brokers
  • floor brokers
  • registered traders
Order Types
  • Market orders– buy or sell at the best current price
  • Limit orders states the buy or sell price
  • Short sales– investor borrows shares and then sells, pocketing the cash. When the price goes down, they buy the stock back and hand the shares back to the lender
  • Special orders have conditions on when to execute
  • Margin transactions– borrow funds to leverage capital

Market makers are assigned stocks to handle by the exchange. They match buy and sell orders and handle special orders. They also act as a dealer to maintain a fair and orderly market by providing liquidity when the normal flow of orders is not present.

Changes in Markets

The presence of large institutions have sparked several trends in the last decades.

Market Trend Effects
  • Negotiated commission rates
  • Influence of block trades
  • Impact on stock volatility
  • Development of electronic markets and dark pools

Trade volumes on listed exchange has been declining, giving way to electronic and foreign exchanges. To stem the flow, off-hour trading has been introduced to moderate success.

Foreign stock is traded on US exchanges. These issuers must present their financial statements under US guidelines. Other trends include the merger of exchanges global exchanges, the decline of regional exchanges and the trading of ETFs.


Market Keys

Figuring out what’s happening in markets at any point in time is tough. Like a thermometer, you can get a reading from a narrow set of tissues to get a feel for the body as a whole.

A stock index performs the same function and requires interpretation to derive value. Markets have a fair amount of correlation. A look at how indexes are structured and the links between can help put together a picture of the market environment.

In this section, we talk about taking the temperature of markets. Then, we delve into indexes and show how they are constructed. Finally, we discuss how the index changes over time.

Market Indexes

Market Index Uses
  • Benchmarks to gauge the track record of pro money managers
  • Create and monitor an index fund
  • Measure market rates of return in econ time studies
  • Predicting future market movements by technicians
  • Proxy for the market portfolio of risky assets when calculating the systematic risk of an asset
Index Construction Factors
  • Size, breadth and source of the sample
  • Weighting comes in three schemes: price weighted, value-weighted and unweighted
  • Computation procedures vary from simple arithmetic changes linked to the base and geometric average of the pieces

Stock Indexes

When monitoring several indexes, you will notice the change in differing amounts.You will find they should be different because they are constructed differently.

A price-weighted index is the sum of current prices which means the stocks with higher prices have a larger effect on its movements. The Dow Jones Industrial Index, the most famous of indexes, was started by financial reporter Charles Dow in 1896 when he would jot down the closing prices of twelve stocks and simply add them up.

Dow Jones Industrial Index Criticisms
  • Sample is limited to thirty non-random stocks to represent about 3,000
  • Its members are the largest and only represent the blue chips
  • Stock splits distort the relative growth of members in favor of the slower ones

A more common way of weighting indexes is by using the total market value of its members. The best example is the S&P 500 index which favors the price movement of the larger firms. Thus, it gives a more accurate picture of the market.

A unweighted index gives equal weight to its members. It is used by individuals who randomly select stock for their portfolio and invest the same amount for each. They are used in academic studies.

Bond Indexes

Bond indexes are little known because they are relatively new and not widely published. Creation and computation of bond indexes is more difficult.

Bond Index Construction Difficulties
  • Universe is much broader than stocks
  • Universe is constantly changing due to new issues and maturities
  • Volatility of prices is due uniqueness of its individual traits
  • Markets are not as efficient and prices rely on more complex factors

Indexes Over Time

Most indexes are market weighted vary due to the differences in the exchanges, segments or countries they source. Bond indexes have tighter correlations relating to the current level of interest rates.

Average stock returns over time tend to favor smaller firms and less developed countries. The riskiness for these trends is inverse, meaning the higher the return, the higher the risk.

Info Sources

Relevant info for decision-making is both key and hard to obtain. In addition to individual issue research, the trend is moving towards Exchange Traded Funds (ETFs).

In this section, we talk about the places you can info on the economy. Then, we show where you can info about markets and industries. Finally, we finish up with where you can find info on specific stocks and funds. Among these sources are descriptions and info on their track record.

Economic Analysis

The best place to obtain info on the US economy is the federal government. Banks are also a rich source of info including Fed Reserve Banks and investment and commercial banks.

US Government Sources

Each Fed Reserve district has their own research department who issues reports. Outstanding national reports published by St. Louis and Philadelphia Feds. Commercial and investment banks send monthly newsletters to client and make available reports online.

Non-US Economic Data

Some individual countries publish national account data and publish bulletins.

Market Analysis

Several government publications provide useful data on the stock and bond markets, but the bulk of detailed info is provided by private firms. The main source of government comes from the SEC in the Annual Report of the SEC. It contain trends and a stat section.

Annual Commercial Publications
Weekly Security Market Publications
Daily Market Publications

Brokerage firms provide information and recommendations on the outlook for markets.

Industry Analysis

There are only a few publications with extensive info on a wide range of industries. The major source of data on various industries are industry publications and trade association magazines.

Industry Publications

Magazines published for various industries are excellent sources of data such as Chemical Week and Automotive News. Trade Associations gather extensive statistics for the industry such as Iron and Steel Institute and American Railroad Association.

Individual Issue Analysis

The most extensive material is available on individual firm’s stocks and bonds. Sources range from the firm themselves to broker reports and investment magazines.

An obvious source of info is the company itself.

Company-Generated Info
  • Annual Reports– must prepare and send to shareholders
  • Security Prospectuses– required info for issuing new securities
  • SEC Reports-  EDGR system 8-K for quarterly info and best is the annual 10-K
Moody’s Publications
  • Industrial Manual- organized by type corporation
  • OTC Industrial Manual- similar to Industrial Manual except focuses on smaller stocks
  • Municipal and Government Manual- data on US government  and states
  • International- major foreign companies

Value Line Publications publishes an Investment Survey with two-part volume contains basic historic info and a weekly section with general investment advice. Their OTC Special Situations guide serves the experienced investor with recommendations.

Fund Analysis

The trend toward ETFs is growing and there will be a lot more emphasis in the days a head. Here are some of the older services with beginnings in traditional mutual funds.

ETF Info Sources

Academic Journals

The material in academic journals differs from investment magazines in timeliness and general orientation. their focus oi more theoretical and empirical analysis.

Academic Journals

On this page, we started by describing markets and how they work. We then looked a little deeper into how to tell what is going on in them. Finally we listed the sources for market info.

Investment Elements

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