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Global Stock Markets

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Better communications and computer technology have reduced transaction costs, making it easier for other financial intermediaries to compete with securities firms. This has led to the emergence of a so-called "national market" system, online discount trading, 24-hour trading of equity securities, and the globalization of equity markets.

The Securities Act Amendment of 1975 mandated that the Securities and Exchange Commission (SEC), the primary regulator of U.S. financial markets, move toward creating a national market system. In its ideal form, a national market system would have a comprehensive method of recording and reporting transactions regardless of where they take place in the country. It would also be a system that allowed investors to get price information from any exchange instantaneously, and thus a way to buy or sell stock at the best price regardless of location. Progress has been made toward electronically linking the national exchanges, regional exchanges, and over-the-counter markets, but we are still many years away from a truly nationwide system.

There is competitive pressure to link international stock markets as well. Many U.S. firms are issuing stocks on overseas exchanges to take advantage of differences in tax laws, to increase their visibility and reputation, and to avoid flooding local stock markets. In 1986, the London Stock Exchange created a computer network similar to the NASDAQ system and permitted U.S. and Japanese investment firms to enter trades on the system. This development was important because it created a virtual 24-hour global trading environment, given time differences between New York, London, and Tokyo.

Stock exchanges in the United States are panicked about losing business to overseas stock markets. As a step toward increasing the global competitiveness of the U.S. financial markets, the SEC permitted after-hours trading on the NYSE. Before this, trading only took place between 9:30 AM and 4:00 PM Eastern time. The NYSE now has several after-hours trading sessions during which shares trade electronically at the day's closing price. The biggest beneficiaries of the NYSE's move toward globalization will be U.S. companies that expect to broaden the market for their securities.
American Depository Receipts

Unfamiliar market practices, confusing tax legislation and insufficient shareholder communication often discourage investors from participating in foreign stock markets. Many foreign companies overcome these road blocks by means of American Depository Receipts (ADR). An ADR is a dollar denominated claim issued by a bank representing ownership of shares of a foreign company's stock held on deposit by U.S. investors. With over 1,600 ADRs from 63 countries trading in the United States, they are very popular with U.S. investors because they allow investors to diversify internationally.

A sponsored ADR is one for which the issuing foreign company absorbs the legal and financial costs of creating and trading the security. An un-sponsored ADR is one in which the issuing firm is not involved with the issue at all and may even oppose it. Un-sponsored ADRs typically result from U.S. investor demand for shares of particular foreign companies.
Regulation of Equity Markets

Trading in securities in the United States is regulated by several laws. The two major laws are the Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 act requires full disclosure of relevant information relating to the issue of new stock in the primary market. This act requires full registration of an IPO and the issuance of a prospectus which details the recent financial history of the company, and is concerned only that the relevant facts are disclosed to investors. The 1934 act established the Securities and Exchange Commission (SEC) to administer the provisions of the 1933 act. It also extended the disclosure of the 1933 act by requiring firms with stocks traded on secondary exchanges to periodically release current financial information.

Under the 1934 act, the SEC has the authority to register and regulate securities exchanges, over-the-counter (OTC) trading, brokers, and dealers. The SEC is responsible for broad oversight of secondary markets. In addition, security trading is also subject to state laws.
Equity Valuation Basics

Stock valuation is a tricky matter and a subject you must understand as a stock investor. To understand stock value you need to understand market capitalization, book value, fundamental analysis, and technical analysis.

Market capitalization is simply the total value of all outstanding shares of a company. To calculate the market capitalization, multiply the total number of shares outstanding of each class of common and preferred stock by its corresponding share price. Assume, for instance, that a company has 1,000,000 shares of common stock outstanding trading at $15 per share and 2,000,000 shares of preferred stock trading at $10 per share. The market capitalization of the company is as follows:

Market Capitalization:
(1,000,000 Shares)($15/Share) + (2,000,000 Shares)($10/Share) =
$15,000,000 + $20,000,000 =

Book value is the value of the company as shown on the firm's balance sheet. This is the value of everything the company owns less everything it owes. This number may not necessarily reflect the true value of the firm, but it is generally a fair indication.

Fundamental analysis focuses on the company's financial information, including the balance sheet, the income statement, and cash flow statement. The primary concept here is that increased earnings enhance the value of the firm. Since the shareholders are the owners of the firm, the idea is that increased corporate profits increase the share price of the company's stock.

Technical analysis attempts to predict the future direction of stock price movements based on three types of information: historical price, volume behavior, and market sentiment.