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.
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.
- 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.
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
- 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.
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.
- National stock exchanges
- Regional exchanges
- Over-the counter
Types of Exchange Members
- commission brokers
- floor brokers
- registered traders
- 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.
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 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
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 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.
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.
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
- Federal Reserve Bulletin– Federal Reserve System
- Survey of Current Business– Commerce Department
- Economic Indicators– Council of Economic Advisors
- Quarterly Financial Report– Federal Trade Commission
- Business Statistics– Commerce Department
- Economic Research Data– Federal Reserve System
- Economic Report of the President– transmit to Congress
- Statistical Abstract of the United States– Census Bureau
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
- Economic Intelligence Unit– quarterly country reviews
- Organization for Economic Cooperation and Development (OECD)– semi-annual trend surveys
- Economist– weekly magazine country reports
- Worldwide Economic Indicators– World Bank research
- Demographic Yearbook– United Nations stats
- United Nations Statistical Yearbook- extensive stats for all UN countries
- Euro-statistics– short-term economic analysis for Europe and US from European Commission
- US International Trade Administration- US Govt Printing comparative economic indicators from Census bureau
- International Financial Statistics– monthly IMF financial stats
- Balance of Payments Yearbook– figures, components and aggregates from International Monetary Fund,
- United Nations,Yearbook of International Trade Statistics– imports and commodities
- United Nations,Yearbook of National Account Statistics- comprehensive source of national account data
Some individual countries publish national account data and publish bulletins.
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
- NYSE Fact Book- outstanding source of current and historical data
- NASDAQ Fact Book– extensive trading volume and info
- Tokyo Exchange Fact Book– English language similar to US Factbook
- Emerging Stock Market Fact Book– IFC annual publication from World Bank
- American Banker Yearbook– annual publication of daily newspaper serving financial community
- Bond Buyer Yearbook– annual publication of daily newspaper serving bond community
Weekly Security Market Publications
- Asian Wall Street Journal– WSJ concentrates on Asian region
- Credit Markets– Bond Buyer longer term review of news
- Banking World– weekly publication of American Banker
- Barron’s– WSJ focus on investment news and statistics
- International Financing Review– international investment banking news
Daily Market Publications
- Wall Street Journal- must read, prominent daily newspaper. You will miss what the herd is doing if you skip it
- Investor Daily- competition to WSJ with focus on technical info
- Financial Times- London version of WSJ
- Bond Buyer– concentrates on stories for the bond market
- American Banker– contains articles of interest to bankers
Brokerage firms provide information and recommendations on the outlook for markets.
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.
- S&P market Intelligence– basic and current analysis
- S&P Analyst’s Handbook– selected income account and balance sheet items data support center
- Value Line Industry Survey– integral part of their advisory service
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.
- 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
- 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.
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
- Business Week– Mutual Fund Scorecard owned by Bloomberg
- Morningstar- premier provider
- Value Line- new kid on the block
The material in academic journals differs from investment magazines in timeliness and general orientation. their focus oi more theoretical and empirical analysis.
- Journal of Finance
- Journal of Financial Economics
- Review of Financial Studies
- Journal of Financial and Quantitative Analysis
- Financial Analysts Journal
- Journal of Portfolio Management
- Journal of Fixed Income
- Journal of Investing
- Journal of Derivatives
- Journal Financial Research
- CFA Digest
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.