Factor Price Paid Into Common Stock Quotes

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The rate of return from any stock investment will depend upon two things: the price paid for it, and the dividend received.

Price quotations of common stocks are to be found in the current newspapers, many of which feature them as part of their financial section. Should a given stock not appear on the published list, then a stockbroker's office will gladly furnish the quotation, often obtaining it by wire from New York if necessary. The price will be based upon what buyers are willing to pay for the stock and what sellers are asking for the stock.

Suppose that Fred finds out from his broker that the stock of Supergadgette Manufacturing is quoted "10-104"; this means that buyers are willing to pay $10 and sellers are expecting to get $10.25 per share for the stock in what are called "round lots"; in the case under discussion, a round lot will very likely be 100 shares. It is easily seen that if any transaction is to take place the price may be anywhere between the figures quoted above; for example, a round lot may have been sold for exactly $10 per share. In Fred's case, he may have to take slightly less ($9.875), because he is not selling a full round lot; this means that someone must combine his shares with other shares to make up a round lot for later sale.

It may be wondered how the newspaper obtains the prices it prints. They are gotten directly from the market place where stocks are traded, called a stock exchange, and the prices themselves are based upon the transactions (purchases and sales) during the day, except that in case no actual sale is made, the prices are those at which offers to buy or sell have been made. We may define a stock exchange as a market place for securities.

It should be emphasized that any stock exchange is now subject to regulation under the Securities and Exchange Act of 1934, by which it agrees to co-operate with the Securities and Exchange Commission (SEC) in the enforcement of the Act and to comply with any rules and regulations, which the Commission may consider desirable. Such a stock exchange is not exactly comparable to a real-estate office, where the broker brings a buyer for a listing given him by a seller; nor is it like an auction, where there is only one seller and the buyers compete among themselves. The stock exchange is really a two-way auction market, but—as it is amazing to find that only about four people in every 10 know—the New York Stock Exchange does not own the stocks listed for sale to the public! Here is how it works: bidders compete with one another to purchase at the lowest possible price the shares they want to own.

Simultaneously, those seeking to sell compete with one another to get the highest price for the shares they are offering. The buyer bidding the highest price and the seller offering at the lowest price agree on a figure which is acceptable to each and the transaction is made. The prices simply reflect the basic law of supply and demand. It is a market place where shares in American industry can be bought and sold almost as readily as you can deposit money in the bank.

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