Technical Analysis of the Financial Markets_1 pdf

Carsrud Professor of Industrial and Systems Engineering, Clinical Professor of Management, and Executive Director of the Eugenio Pino and Family Global Entrepreneurship Center, Florida I

The Stock Market

Advisory Board

Alan L Carsrud

Professor of Industrial and Systems Engineering, Clinical Professor of Management, and Executive Director of the Eugenio Pino and Family Global Entrepreneurship Center, Florida International University

Alan Reynolds

Senior Fellow

Cato Institute

Wesley B Truitt

Chairman and Series Editor

Adjunct Professor

Anderson Graduate School of Management

University of California, Los Angeles

Walter E Williams

John M Olin Distinguished Professor of Economics

George Mason University

Charles Wolf Jr

Senior Economic Advisor and Corporate Fellow in International Economics The RAND Corporation

The Stock

Market

RIK W HAFER AND

SCOTT E HEIN

GR E E N W O O D GU I D E S T O BU S I N E S S A N D EC O N O M I C S

Wesley B Truitt, Series Editor

GREENWOOD PRESS

WESTPORT, CONNECTICUT  LONDON

Library of Congress Cataloging-in-Publication Data

Hafer, R W (Rik W.)

The stock market / Rik W Hafer and Scott E Hein.

p cm — (Greenwood guides to business and economics, ISSN 1559–2367)

Includes bibliographical references and index.

ISBN 0–313–33824–8 (alk paper)

1 Stock exchanges 2 Stock exchanges—United States I Hein, Scott E., 1949– II Title.

HG4551.H23 2007

332.64'2—dc22 2006029484

British Library Cataloguing-in-Publication Data is available.

Copyright # 2007 by Rik W Hafer and Scott E Hein

All rights reserved No portion of this book may be

reproduced, by any process or technique, without the

express written consent of the publisher.

Library of Congress Catalog Card Number: 2006029484

ISBN: 0–313–33824–8

ISSN: 1559–2367

First published in 2007

Greenwood Press, 88 Post Road West, Westport, CT 06881

An imprint of Greenwood Publishing Group, Inc.

www.greenwood.com

Printed in the United States of America

The paper used in this book complies with the

Permanent Paper Standard issued by the National

Information Standards Organization (Z39.48–1984).

10 9 8 7 6 5 4 3 2 1

Gail and Cait Ellen, Tracey, and Jocelyn

Appendix: Companies Listed in the Dow Jones Industrial Average 123

FIGURES

7.1 Dow-Nikkei-FTSE and Adjusted Dow-Nikkei-FTSE,

7.2 Economic Growth before and after an Exchange

TABLE

7.1 Exchanges Ranked by Market Capitalization

Series Foreword

Scanning the pages of the newspaper on any given day, you’ll find headlines like these:

‘‘OPEC Points to Supply Chains as Cause of Price Hikes’’

‘‘Business Groups Warn of Danger of Takeover Proposals’’

‘‘U.S Durable Goods Orders Jump 3.3%’’

‘‘Dollar Hits Two-Year High Versus Yen’’

‘‘Credibility of WTO at Stake in Trade Talks’’

‘‘U.S GDP Growth Slows While Fed Fears Inflation Growth’’

If this seems like gibberish to you, then you are in good company To most people, the language of economics is mysterious, intimidating, impenetrable But with economic forces profoundly influencing our daily lives, being fa-miliar with the ideas and principles of business and economics is vital to our welfare From fluctuating interest rates to rising gasoline prices to corporate misconduct to the vicissitudes of the stock market to the rippling effects of protests and strikes overseas or natural disasters closer to home, ‘‘the econ-omy’’ is not an abstraction As Robert Duvall, president and CEO of the National Council on Economic Education, has forcefully argued, ‘‘Young people in our country need to know that economic education is not an option Economic literacy is a vital skill, just as vital as reading literacy.’’1 Under-standing economics is a skill that will help you interpret current events that are playing out on a global scale, or in your checkbook, ultimately helping you make wiser choices about how you manage your financial resources—today and tomorrow

It is the goal of this series, Greenwood Guides to Business and Economics,

to promote economic literacy and improve economic decision-making All seven books in the series are written for the general reader, high school and college student, or the business manager, entrepreneur, or graduate student in business and economics looking for a handy refresher They have been written by experts in their respective fields for nonexpert readers The ap-proach throughout is at a ‘‘basic’’ level to maximize understanding and de-mystify how our business-driven economy really works

Each book in the series is an essential guide to the topic of that volume, providing an introduction to its respective subject area The series as a whole constitutes a library of information, up-to-date data, definitions of terms, and resources, covering all aspects of economic activity Volumes feature such elements as timelines, glossaries, and examples and illustrations that bring the concepts to life and present them in a historical and cultural context The selection of the seven titles and their authors has been the work of an Editorial Advisory Board, whose members are the following: Alan Carsrud, Florida International University; Alan Reynolds, Cato Institute; Robert Spich, University of California, Los Angeles; Wesley Truitt, Loyola Mary-mount University; Walter E Williams, George Mason University; and Charles Wolf, Jr., RAND Corporation

As series editor, I served as chairman of the Editorial Advisory Board and want to express my appreciation to each of these distinguished in-dividuals for their dedicated service in helping to bring this important series

to reality

The seven volumes in the series are as follows:

The Corporation by Wesley B Truitt, Loyola Marymount University

Entrepreneurship by Alan L Carsrud, Florida International University, and Malin Bra¨nnback, A˚bo Akademi University

Globalization by Robert Spich, Christopher Thornberg, and Jeany Zhao, UCLA Income and Wealth by Alan Reynolds, Cato Institute

Money by Mark F Dobeck and Euel Elliott, University of Texas at Dallas The National Economy by Bradley A Hansen, University of Mary Washington The Stock Market by Rik W Hafer, Southern Illinois University–Edwardsville, and Scott E Hein, Texas Tech University

Special thanks to our senior editor at Greenwood, Nick Philipson, for conceiving the idea of the series and for sponsoring it within Greenwood Press

xii Series Foreword

The overriding purpose of each of these books and the series as a whole is,

as Walter Williams so aptly put it, to ‘‘push back the frontiers of ignorance.’’

Wesley B Truitt, Series Editor NOTE

1 Quoted in Gary H Stern, ‘‘Do We Know Enough about Economics?’’ The Region, Federal Reserve Bank of Minneapolis (December 1998).

Series Foreword xiii

Preface and Acknowledgments

Readers familiar with the complexities of the stock market may be struck by the brevity of this book Our goal is not to cover the entire landscape en-compassing the stock market and its related areas What the book does ac-complish is to give you a glimpse into the many-faceted subject of stocks and financial markets With this in mind, the treatment is not exhaustive but, we trust, inclusive enough to provide an overview of the stock market: how it began, how it functions, and some of the instruments traded, from common

to arcane Although the focus is primarily on the U.S stock market, given the increasingly interrelated nature of financial markets, there is some discussion

of the development of foreign stock exchanges and how their formation may

be related to economic development

Today’s stock market, both here and abroad, represents the culmination of

a long development in financial assets and the procedures by which they are traded While early markets traded shares of stocks in companies, something that continues to this day, modern stock exchanges allow for the trading of many more sophisticated assets Options, other derivatives, and the like are all part of the market’s offering And as the sophistication of assets traded has increased, so have the methods by which they are traded From the early days when the introduction of the telegraph and telephone connected investors across the country with the exchanges, modern technology in the form of electronic trading, such as the National Association of Securities Dealers Automated Quotation (NASDAQ) exchange, is predictably crowding out the quaint, though antiquated, face-to-face kind of trading And such tech-nology means more efficient and speedy flows of information Consequently, modern traders can watch, in real time, the value of their stocks change on their laptop computers

Such flow of information creates problems for regulating the market Regulations passed in past decades are made obsolete by new technologies and new products The age-old debate whether regulation helps or hinders markets allocate financial capital continues, but there is some evidence that unbridled trading can lead to undesirable consequences For many, the stock market crashes of 1929, 1987, and the meltdown that began in 2000 are evidence that some regulation may be optimal Without trying to solve the debate, the notion of why stock markets are regulated and how key regula-tions developed are covered

In trying to cover the topic, it is necessary to use a language that may seem arcane Like any other topic, there are terms specific to finance and economics and stock markets Such language will creep into the discussion, hopefully only when necessary At all times, however, the goal is to present the material

in a manner that is accessible to the general reader If we are successful, this book will not be the last book on the topic you pick up

A number of people helped us bring this book into existence We would like to thank Nick Philipson, Senior editor for Business/Economics at Greenwood Publishing Group, and Wesley Truitt, editor of this series, for involving us with this project and providing encouragement, comments, and assistance along the way We also thank David Amable for his help in searching out data and Stephanie Leskovisek, Janet Novosad, and Shelby Otta for getting our rough drafts into more readable form Tracey Griffith read and commented on much of the book in earlier drafts and she expertly compiled the glossary that accompanies the book For this, we owe her a special debt of gratitude We also would like to acknowledge the benefits we have gained from many teachers and colleagues, too many to name in-dividually, who helped in our understanding of the stock market Finally, we especially thank our wives Gail and Ellen and all of our children, first for their inspiration, and second for their forbearance through the project We hope that they approve of the results

xvi Preface and Acknowledgments

Germany, officially establishing the stock exchange

1790 Federal government refinances Revolutionary War debt This

includes both federal and state debt, totaling almost $80 million in bonds The first significant issue of publicly traded securities

the beginning of the organized securities trading in what would become the New York Stock Exchange (NYSE) The Bank of New York is the first company listed

Exchange is officially created

created and locates at 40 Wall Street

1835 A fire destroys over 700 buildings in lower Manhattan forcing

the NYS&EB to relocate to temporary headquarters

1844 The invention and use of the telegraph allows brokers and

investors outside of New York City to communicate with the stock exchange

share trading in the Amsterdam exchange, one of the world’s oldest