Understanding the Stock Market

Insider information in a stock market is defined as illegal trading by individuals who have access to non-public information and who attempt to profit from such knowledge.  Insider information is a breach of a fiduciary duty and also includes tipping non-public information.  For example, a corporate officer who trades corporate securities after learning of confidential developments would have breached his fiduciary duty, and anyone involved in these transactions i.e. individuals who acted on this corporate officer’s confidential information would also be guilty of insider trading.  The information must be material, non-public information.

Additionally, the SEC requires that if a company intentionally discloses material non-public information, it must then simultaneously disclose that information to the public so that the information is, in effect, no longer non-public.  Security analysts are responsible for compiling information and they often talk to corporate officers and insiders; as such, these individuals must be careful not to cross legal lines as they also issue recommendations to traders.

The Stock Market Index

Stock market indices are methods of measuring sections of the stock market.  Financial services firms cite indices, which benchmark the performance of portfolios.  Global stock market indices, such as the S&P Global 100, ignore where a country is domiciled or traded.  National indices represent a stock market’s performance in a specific nation, which in turn reflects the sentiment of investors of that nation’s economy.  The American Dow Jones Industrial Average and S&P 500 are examples of national indices.  The Dow Jones Total Market Stock Market Index represents stocks of virtually every public traded American company.

There are also specialized indices that track the performance of specific sector within the market.  For example, the Linux Weekly News tracks stocks of companies that sell products based on the popular Linux system.  The Morgan Stanley Biotech index consists of dozens of American firm within the biotechnology industry.

Some indexes actually have multiple versions.  The S&P 500, for example, has three versions: (1) price return, which considers components’ price, (2) total return, which accounts for dividend reinvestment, and (3) net total return, which accounts for dividend reinvestment after the withholding tax is deducted.

Stock Prices: Income vs. Growth

An income stock tends to have a flat price.  In other words, every year the price of the stock stays stagnant unless the company records large profits.  People receive money each year from dividends, yet the business may not be growing.  However, if the company decides to expand, then this is behavior of a growth company.  In this situation, the value of the stock will rise because there will now be twice as much equipment and profit earning by the company.  Shareholders do not receive a yearly dividend in growth stocks, but they do own a company with increasing value; thus, the shareholders will obtain more money when they sell their shares.  Ideally, someone would research the company and learn about its increasing value, which stems from the value of the buildings and equipment, and with that the increasing profit of the company.  This party would then pay a higher price for the stock, and the original shareholder will earn a profit from the sales.

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