Page 144 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

130 The Complete Guide to Executive Compensation

The traditional form of a stock exchange is a physically located stock exchange. The New
York Stock Exchange (NYSE), dating back to 1792 with transactions under a buttonwood
tree, is not only the oldest but also the largest in the United States. It is often referred to as
the Big Board. The American Stock Exchange is similar to the NYSE but much smaller.
Additionally, there are a number of regional stock exchanges in the United States. The
NASDAQ (National Association of Stock Dealers Automated Quotation System) is also a
stock market, but unlike the above named, has no physical presence. On the New York Stock
Exchange floor, specialists match buy and sell orders to complete the transaction. In the
NASDAQ, the buy and sell orders are electronically matched. Tongue in cheek, some have
said that NASDAQ is an acronym for No Answers, So Don’t Ask Questions.
A stockbroker is a person who is authorized to buy and sell stock on a stock exchange on
which the broker is a member. Stock not sold through a stockbroker is called over-the-counter
(OTC) stock, referring to its 19th century origins where owners sold shares of their stock over
the counters of their shops directly to a buyer.
In 1896, Charles Dow and Edward Jones established the Dow Jones Industrial Average
(DJIA) Stock Index. It used 12 stocks to give the investor a sense of what was happening
in the stock market. In 1916, it expanded to 20, and in 1928, rose to 30, where it
remains. Companies have been deleted or replaced by others for various reasons and, of
those that remained, many have done so under different names, sometimes with different
industry focus.
One has to look no further than the list of the original 12 companies in the index to see
the difficulty of remaining in business. The companies were American Cotton Oil, American
Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric,
Laclede Gas, National Lead, North American Co., Tennessee Coal & Iron, U.S. Leather,
and U.S. Rubber. See many familiar names?
The DJIA is price weighted, meaning that a stock selling for $80 will have twice the
weight of one in the index selling for $40 a share.
While a list of some 30 companies, even though representing various industries, is
arguably not a very effective indicator of market movement, the rejoinder is that the market
capitalization, or market cap for short, of those companies often accounts for 20 percent or
more of the entire stock exchange market cap for listed companies. As one might expect, the
DJIA is made up of very large-cap companies, whereas the Russell 2000 consists of small-cap
stocks listed on the NASDAQ. A broader-based index is the Standard & Poor’s (S&P) 500,
introduced in 1957, consisting of 500 widely held stocks listed on the New York Stock
Exchange. However, the Wilshire 5000 Index is probably the broadest measure of the United
States stock market as it contains 5,000 different daily priced stocks.
Market capitalization is determined by multiplying the stock price by the number of
common shares outstanding. Definitions vary, but representative definitions might be as
follows: micro-cap (under $100 million), small-cap (over $100 million but less than $1 billion),
mid-cap (over $1 billion, but less than $10 billion), large-cap (over $10 billion but less than
$100 billion), and mega-cap (above $100 billion).
Bear stock market terminology is a function of severity of decline measured within a few
days start-to-finish. This might include a routine decline (drop of 5 percent), a correction
(10 percent), a severe correction (15 percent), and a crash (20 percent or more). As of this
writing, there were only three days when the closing DJIA had a correction of more than
10 percent: October 28, 1929 (12.8 percent), October 29, 1929 (11.7 percent), and October
19, 1987 (22.6 percent).