a security, and the price at which an investor can buyit from a broker-dealer.Quotation: Refers to the highest bid and lowest offer (ask) price currently available on a security or commodity. An investor who asks for a quotation or quote onAOL may be told “70 to 701/2.” This means that the best bid price is currently $70per share and that the best ask a seller is willing to accept is $701/2 at that time.Hedging: Reducing the risk of loss by taking a position through options thatbalances out or significantly reduces the risk of the current position held in themarket.
Nasdaq offers brokers the ability to trade directly from their offices using telephones and continuously updated computerized prices. In this way, they bypassfloor traders and the need to pass along a commission to them. This means that theyget to keep more of the commission for themselves. There are no specialists, either,but there are market makers.Day trading has become an important aspect of the stock market today. The market crash of 1987 brought about the creation of the Small Order Entry System(SOES), which overcame early inefficiencies and now permits lightning-fast executions for orders up to 1,000 shares. This system spawned the birth of day trading,because it permitted the little guy to compete with institutional traders, using theSOES system with other, previously unavailable, technology. The day trader sits in
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front of a computer monitor and takes advantage of the spread on a stock by splitting it. If the spread is a quarter (1/4 point), the day trader places an order that falls inthe middle of it, and in many cases will get an execution, or fill. This new “SOESbandit” began to feast on the market makers’ spreads, trading dozens or even hundreds of times daily, taking his or her bite out of spreads that until then had been thesole domain of the market maker. (If you don’t think this is much money, considertaking just 1/8 point, or $0.125, multiply that by 1,000 shares ($125), then multiplythat by 10, 20, 50, and more. Now you can see why day trading is so appealing!Although day trading, as it is done today, is relatively new, short-term tradershave been around a long time. Traders are simply those individuals who makeassessments as to the price change of a stock over the course of a few days,weeks, or months and try to buy a stock at a low price and then sell it back later ata higher price.The short-term trader and professional have always been an important part of thestock market. Recently, the individual has become more active—some as long-terminvestors and others as aspiring traders. In fact, due to the strong performance of thestock market throughout the 1990s, droves of individual traders wanting a piece ofthe action were responsible for the emergence of financial web sites that cater toindividual investors. Financial services and investment firms, financial publications,and entrepreneurs have joined in this modern-day gold rush by creating a host ofproducts and sources of stock market information.Weeding through the profusion of investment information is one of thechallenges of the new millennium.
THE NEW ERAPrior to the great advances in technology and the advent of the Internet, individual investors were limited in the amount of stock market information that was available tothem. Financial newspapers like the Wall Street Journal and Investor’s Business Dailyhave been in existence for some time and provide a wealth of stock market data. Asidefrom that, there weren’t a lot of alternatives available to the retail investor.Wall Street brokerage firms publish detailed research reports on the stock marketand companies, but limit their distribution to existing clients. Other financial publishers such as Standard & Poor’s and Value Line produce timely investment research. Unfortunately, for the individual investor, the cost associated with suchproducts has been overwhelming. The alternative was to visit the local library, pullthe 10-pound publications off the shelves, and sift through stacks of pages in an effort to find a good investment.Technology has changed all that. Today it’s possible, sitting in the comfort ofyour own home, to read research reports on individual companies, do searches andscreens, obtain market commentary, get price quotes, even trade. The Internet has
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WELCOME TO THE STOCK MARKET
The Wall Street Journal: With worldwide distribution and an extensive readership, the Wall Street Journal is packed with financial information and has theability to significantly influence the markets. For a company to get in the WallStreet Journal is news (interactive.wsj.com).Investor’s Business Daily: Founded by William J. O’Neil, the IBD was originallydeveloped to add a new dimension of crucial information to the investmentcommunity. The IBD focuses on concise investment news information, sophisticated charts, tables, and analytical tools while adding valuable information thatthe Wall Street Journal may not provide (www.investors.com).
wired individual investors directly into the market. So there’s no longer a need towait for the morning paper to see what happened in the market. Thanks to the Internet, you can see it as it happens.In addition to easier access to greater amounts of information, investors todayhave more investment alternatives. Specifically, stock investors have the choice ofbuying shares of individual companies or buying groups of stocks through investment vehicles known as mutual funds and index shares. While mutual funds havebeen around for a long time, the growing interest in index shares is relatively new.Let’s explore both.
Mutual FundsMutual funds have become extremely popular. In 1983, for instance, there were alittle over 1,000 funds. By the end of 1999, there were over 7,000! One reason forthe growth stems from the fact that mutual funds offer a solution to the problem of“smallness.” That is, most households do not have sufficient savings to buy a sufficiently diversified portfolio. The pooling of investor capital provides the ability tobuy a greater number of stocks, spreading the risk with diversification. If one stockor sector has a bad month or quarter, another portion of the fund will probably dowell, mitigating the setback.Another reason for the popularity of mutual funds is that,for many investors, they make life easier. By investing in a mutual fund,rather than making the buying and selling decisions yourself,you’re hiring a portfolio manager to do that job for you.
Mutual funds are investment vehicles operated by investment companies and areheavily regulated by the Securities and Exchange Commission (www.sec.gov).Specifically, a mutual fund is a pooling of money by a group of people with similarinvestment objectives and risk tolerances. An investment company is in charge ofthe mutual fund, which consists of money from a number of like-minded investors.
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Mutual funds: An investment company that pools investors’ money to invest in avariety of stocks, bonds, or other securities. Each mutual fund’s portfolio matchesthe objective stated in the firm’s prospectus; the type of portfolio guides thefund’s professional manager to pick appropriate securities for the fund to buy.
The fund is then used to create a diversified portfolio of stocks, bonds, or a combination of the two. Unlike a stock that trades on a stock exchange, mutual fundshares are purchased through the investment company. If you decide to buy theXYZ fund, your money goes to the mutual fund company. A professional investor,hired by the investment company, makes the investment decisions. In essence, investment companies need little or no capital of their own. Through sales and marketing they gather assets from individual investors to be managed.Mutual funds are divided into two categories: open-ended and closed-end funds.Both varieties have portfolios of stocks (and sometimes bonds) and cash that areprofessionally managed. The market value of the portfolio is called the net assetvalue” or NAV. The NAV is calculated by dividing the number of shares by the market value of the fund’s portfolio. This is the main difference between the openended and closed-end funds: The closed-end fund has a fixed number of shares,whereas the open-ended fund continually issues new shares (new money is deposited) or redeems shares (money is withdrawn). A closed-end fund trades on anexchange, with a bid and ask like any other shares. The NAV may be greater or lessthan the market price of the fund at the end of each day.
Open-ended fund: A mutual fund that sells its own new shares to investors, buysback its old shares, and is not listed for trading on a stock exchange. The openended fund gets its name because its capitalization is not fixed and it normallyissues more shares as demand for the shares increases.Closed-end fund: An investment company that issues a fixed number of sharesin an actively managed portfolio of securities. The shares may be of severalclasses; they are traded in the secondary marketplace, either on an exchange orover-the-counter (OTC). The market price of the shares is determined by supplyand demand and not by net asset value.Net asset value (NAV): The value of a fund’s investments. For an open-endedmutual fund, the net asset value per share usually represents the fund’s marketprice, subject to a possible sales or redemption charge. For a closed-end fund,the market price may vary significantly from the net asset value.
The open-ended fund never trades at a premium or discount to its NAV. The valueis the NAV, not what the market decides it should be. The open-ended fund is subdivided a few more times, the first classification being load and no-load funds. A
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WELCOME TO THE STOCK MARKET
no-load fund has no sales charge, or load. Every dollar deposited buys one dollar’sworth of shares at the current NAV. The load fund has a sales charge associated withit; that is, a commission is charged to purchase the fund’s shares. Load funds havetaken a lot of flak for charging a commission, mostly from proponents of the no-loadapproach. Load funds are sold most often by registered representatives or stockbrokers. They are, after all, in business to make money by dispensing financial advice,and would make nothing for their time and trouble by recommending a no-load fund.
Load fund: An open-ended mutual fund with shares sold at a price including asales charge—typically 4% to 8% of the net amount indicated. A load impliesthat the fund purchaser receives some investment advice or other service worthy of the charge.No-load fund: An open-ended mutual fund whose shares are sold without asales charge. Although sometimes there are other distribution charges, a true noload fund will have neither a sales charge nor a distribution fee.
To lessen buyer resistance when selling a load fund (when they’re being compared to a no-load), load funds have begun to offer different classes of funds that offer the investor various choices. A description of these classes can be found inFigure 1.3.
Index FundsA variation of the mutual fund is the index fund. An index is simply an average of agroup of stocks. Most evenings, reporters cite the daily point movement in the DowJones Industrial Average. The Dow Jones Industrial Average is an index that monitors 30 select stocks including Intel, Procter & Gamble, Hewlett Packard, and others. There are also mutual funds that are designed to mirror the performance of anindex. In an index fund, investors are pooling their money, but rather than hiring aportfolio manager to make specific buy and sell decisions, the stocks within thefund mirror the index.
Index fund: A group of stocks that make up a portfolio in which performancecan be monitored based upon one calculation.
Why would an investor want to mirror an index rather than have a professionalmake individual buy and sell decisions that reflect the sensitivity of market movement? For one thing, it’s less expensive. Mutual funds carry fees in one form or another. A fund that requires a sales charge when money is invested is called a load
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Class
Sales Charge
Class A: Sales chargeimposed on new deposits
For every dollar invested, the load is chargedbefore the money is invested. If the load is 3%,then $0.97 of every dollar is invested.Advantage: Load is paid and forgotten; money canbe withdrawn without penalty.
Class B: Sales chargeplaced on any withdrawalsbefore a certain date
Investors are not charged when they deposit theircash into the fund in exchange for pledging toleave the money in the fund for a certain numberof years. The fee is reduced annually on a slidingscale until the time period is complete. Any newdeposits are subject to the new time restrictions.Withdrawals are treated (most often) using the FIFOmethod of accounting (first in, first out).Advantage: More dollars are working for you rightaway; there’s no deficit to overcome, as is the casewith Class A shares.Disadvantage: If you need your money sooner thanoriginally planned, the amount withdrawn mightbe greater than the amount deposited, meaning thesurrender fee is more than the initial sales chargemight have been (as in the example of Class Ashares).
Class C: One-yearsurrender period, with earlywithdrawal charge of 1%.
Figure 1.3
At first, Class C offers the best of all worlds: nocharge going in and only a one-year surrenderperiod. However, annual charges are higher andnever go away, so they end up cutting into yourrate of return.
Description of Classes of Load Funds
fund. So if you invest $10,000 and the load is 5%, $500 will come out of your investment and be paid to either the investment company or the broker who sold youthe fund. Index funds have no front-end sales charges and are, therefore, no-load.Mutual funds also have annual management fees that go to pay the fund manager—around 1% or 2%. Index funds, however, have no portfolio manager and thereforepay out no management fees.In addition to being less expensive, index funds have historically offered superior performance on average. Interestingly, although there is no manager at thehelm, index funds have, over the long term, bested the performances of most
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WELCOME TO THE STOCK MARKET
portfolio managers. Given the superior performance and low cost, index funds havebecome among the most popular types of mutual funds. In fact, the largest mutualfund as of this writing is the Vanguard 500 Index fund that tracks the performanceof the S&P 500 index.Index shares are relatively new instruments. Similar to index funds, index sharesmirror the performance of a market average. In 1993, the American Stock Exchangelaunched Standard & Poor’s Depositary Receipts (SPDRs, pronounced “spiders”),which track the S&P 500 index. Unlike index funds, shares are purchased on the exchange like a stock. The SPDRs proved extremely popular, and as a result, in 1998the American Stock Exchange launched an index share on the Dow Jones IndustrialAverage, and in 1999 on the Nasdaq 100 index. Furthermore, the growing popularity of index shares has led a San Francisco-based financial adviser—Barclay’sGlobal Investors—to launch a series of 50 index shares called iShares.
AFTER-HOURS TRADINGThe demand for more trading just keeps rising. Unfortunately, the auction-stylemarket is simply ill-suited to providing the additional trading capacity necessary tocater to the ongoing desire for trading after four o’clock eastern time. By the end ofa busy workday, floor traders are ready to quit for the day. As stock market feverreaches Middle America, people in later time zones are increasingly interested ingetting involved, but in many cases cannot due to working hour conflicts. It seemsonly logical, then, for the brokerage industry to band together to offer late-afternoonor early-evening trading sessions.Advances in technology and electronic trading have made after-hourstrading possible, filling the demand of the individual investor andextending the revenue stream of participating brokerage houses.
There are a number of ways to trade after hours. Many brokers are offering theability to trade a limited number of Nasdaq issues beyond four o’clock eastern time.The Nasdaq, as the sole all-electronic exchange, is the only big exchange that canfacilitate after-hours trading. But new systems called electronic communicationsnetworks (ECNs)—such as Island, Instinet, and others—provide execution servicesto the after-hours brokers who funnel their orders through their respective systems.At this time, other exchanges simply can’t sustain around-the-clock pit-tradingoperations for conducting transactions. Perhaps this may change in the future, butfor now this is the state of after-hours trading.One big reward of after-hours trading is that traders can take advantage of newsevents such as earnings and other announcements that commonly occur after themarkets close. An investor trading during traditional market hours must wait untilmorning to buy or sell a favorable or unfavorable position. Those investors whoseaccounts are linked through their brokers to an ECN can make their transaction
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immediately upon hearing the news (provided that it occurs before eight o’clockeastern time, when after-hours trading ends).Another version of extra-hours trading is premarket trading, essentially the sameas after-hours trading, but commencing at seven o’clock in the morning easterntime. This is convenient for many on the East Coast who wish to trade for an houror so before heading to work in the morning.One of the drawbacks to pre- or postmarket trading is that the shares can befairly thinly traded. This can lead to price swings that may or may not be favorablefor those investors trading the shares upon the resumption of regular market hours.For instance, if a company announces earnings after the market closes and theshares trade up several percentage points in after-hours trading, there’s no guarantee that they will hold their value into the regular trading session the next day. Subsequent late evening or early morning news commentary may swing the sentimentin the other direction. The stock may even gap down to start the next day. Similarly, if a company makes an announcement and the primarily retail after-hourstrading community sees this as a bearish signal, it may drive the stock down several dollars in the evening session. Yet the market may be met with analysts’ reiterations of their own “buy” or “hold” recommendations when regular tradingresumes the next day. This could bring the price back to the previous day’s regularhours levels. Those who sold a previously entered position in the extended sessions will wish they’d waited to take action, while those who shorted (sold) thestock may be scrambling to cover their losses by exiting the position. (We’ll discuss shorting stocks in Chapter 3.)
Gap down: A gap down occurs when a stock price opens much lower than itclosed on the previous day. It is most often the result of bad news after the market closed. In looking at stock price charts, a gap (area of empty space) in theprice data sometimes occurs. This happens when the opening price on one dayis significantly lower than the closing price the day before. For instance, if thestock of Microsoft closes the day at a price of $50 and, due to some news eventafter the market closes, the next day it opens at a price of $40, there will be agap in the chart.Shorting a stock: Selling a security that the seller does not own but is committedto repurchasing eventually. This technique is used to capitalize on a decline in asecurity’s price.
It is interesting to note that companies usually make important announcements after regular trading hours. In many ways, this is a liability issue. Companies are responsible to their shareholders. By making an announcementafter-hours (such as earnings), investors and analysts have enough time to analyze the information and decide on an appropriate response by the time the markets open up in the morning.
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ALTERNATIVES TO STOCKSAlthough investing in stocks can be quite lucrative, it is essential to diversify yourmoney into a variety of investment instruments. Each instrument comes with itsown advantages and disadvantages, as well as risk and reward profile. If the markets are in a bearish slump, you may want to consider investing in one or two ofthese alternatives to avoid losses.
Cash EquivalentsWhen I have cash I’m not ready to put in the market, I park those funds in cashequivalents—certificates of deposit (CDs), Treasury bills (T-bills), and money market funds. Cash equivalents offer investors a slightly lower fixed rate of return without any risk of loss. The advantage of these instruments is that, while they do offer areturn, money is not tied up for long periods of time and, in the case of money markets, can be easily converted to cash. In terms of risk and reward, cash equivalentsoffer little of both. The three most common cash equivalents are:• Certificates of deposit (CDs): Fixed-income debt securities issued by banksusually in minimum denominations of $1,000 with maturity terms of one tosix years.• Treasury bills (T-bills): Short-term debt securities issued by the U.S. government (minimum amount $10,000) with maturities of 13, 26, and 52 weeks.• Money market funds: Funds organized to buy short-term high-quality securities like CDs, T-bills, and short-term commercial paper. Investors can buy andsell shares through a mutual fund company.
Debt: A security that represents borrowed money and that must later be repaid.In other words, an IOU.
CommoditiesCommodities compose the raw materials used in most retail and manufacturedproducts. The five major categories are: grains, metals, energies, raw foods, andmeats (see Figure 1.4). Some are seasonal in nature (heating oil, for instance),which causes demand to fluctuate based on the time of year and climatic conditions.Others react to specific events: A drought in the Midwest can send grain prices soaring. Commodities are also very leveraged investments. A small amount of cash cancontrol many times its face value in commodity contracts. But this works both
ALTERNATIVES TO STOCKS
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Grains
Metals
Energies
Raw Foods
Meats
CornSoybeansWheat
GoldSilverCopper
Crude oilNatural gasHeating oil
CoffeeCocoaSugar
Live cattleLive hogsPork bellies
Figure 1.4
Major Commodity Categories and Examples
ways, creating huge potential wins and losses. Due to its high-risk nature, this areaof investing is utilized mostly by professional traders.Commodities are traded as futures contracts. In addition, the futures market consistsof a variety of financial instruments, including debt instruments such as bonds andTreasury notes and currencies such as the Canadian dollar and the Japanese yen. A futures contract, then, is an obligation to buy or sell a specific quantity of a commodity,currency, or financial instrument for a predetermined price by a designated date.
Futures contract: An agreement from a buyer to accept delivery (or for a sellerto make delivery) of a specific commodity, currency, or financial instrument at afuture date.
Farmers and producers initially used futures contracts to lock in the price of acertain crop or product cycle. That’s why traders who intend to sell or take deliveryof a commodity are called hedgers. For example, if a farmer grows wheat, soybeans, and corn, he (or she) can sell the product with a futures contract before it isactually harvested and ready for sale. In other words, if the farmer believes the priceof corn is at an attractive level, he (or she) can sell a corresponding number of futures contracts against the expected production. An oil company can do the samething. It may want to lock in the price of oil at a certain point to guarantee the priceit will receive. For instance, Exxon Mobil Corp. (XOM) may sell crude oil futures,one year away, to lock in that specific price because the company has to know theprice in advance to be able to plan production costs accordingly.Most futures contracts are bought on speculation about future prices, and mostfutures traders are speculators (i.e., they do not expect to take delivery of the product or lock in a crop price). For example, if you believe corn prices will rise in thenext three months, based upon whatever information you may have, you could buythe corn futures a few months out. High-risk speculators have the same objective asstock traders. They intend to buy low and sell high. They make money by forecasting price movement. The primary difference is that futures contracts expire on acertain date. This adds a completely new dimension to the trading process. Speculators not only have to forecast price movement, but they also need to predict when aprice will be higher or lower. This makes futures trading, although sometimes lucrative, very risky.
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Therefore, in terms of risk and reward, futures contracts are at the opposite endof the spectrum from cash equivalents. Figure 1.5 shows how investments fall alonga continuum of risk and reward, with futures at one end and cash equivalents at theother. It is also important to note that stocks vary in terms of risk and reward. Thatis, some stocks with little history and no earnings will be considered high-risk/reward, while a well-established company with a history of dividend payments willbe lower-risk/reward.
BondsBonds are highly popular debt obligations that pay periodic interest at a fixed rateand promise repayment of the principal at maturity. Buying bonds is comparable tomaking a loan at a fixed rate of interest. Each bond pays a fixed interest rate. At theend of a predetermined period, the loan is paid back. The borrower can be the government, a municipality, or a company (see Figure 1.6). Each borrower is obligatedto pay back the loan at the end of the bond’s term—at maturity.Although there is a promise of repayment at maturity, the market price of a bondwill fluctuate in response to the rise and fall of interest rates. Let’s say that you decide to lend me $1,000 for a five-year period of time. I agree to pay you interest at arate of 8%—$80 per year interest. Shortly afterward, interest rates jump to 10%.Now you could have lent the same $1,000 and received 10% interest—$100 per
Figure 1.5
Trading Instrument Risk Graph
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Bond Issuer
Name
Duration
U.S. federal government
Treasury bonds
Maturity of 10 years or more
Treasury notes
Maturity of between one and 10years
Treasury bills
Maturities of no more than oneyear and no fixed interest rate
State, city, or municipality
Municipal bonds*
Varies
Corporations
Corporate bonds
Varies
*Interest paid on municipal bonds is not subject to federal taxes, and in some cases not subject tostate taxes.
Figure 1.6
Bond Breakdown
year. Did the value of the first loan go up or down with the interest rate rising? Thevalue of the 8% loan went down primarily because you do not have the opportunityto lend it out at the higher rate of interest. Therefore, when interest rates go up, bond(loan) prices fall. Conversely, when interest rates fall below the interest rate guaranteed on a specific bond, that bond increases in value.
Interest rate: The charge for the privilege of borrowing money, usually expressed as an annual percentage rate of the principal amount borrowed.
Federal bonds are backed by the full faith and credit of the United Statesgovernment, and are considered to be the safest investment in the world.
Municipal and corporate bonds are rated according to the creditworthiness of theissuer, and range from high-grade bonds down to what’s become known as junkbonds. The higher the rating, the lower the interest rate paid. Bonds are traded afterthey are issued; depending on a bond’s interest rate (yield), it may be worth more orless than par value (usually $1,000) in the aftermarket.Interest rates are based on the federal funds rate, which is set by the Federal Reserve Board. The current Fed chairman, Alan Greenspan, is assisted by the Board ofGovernors in determining what the federal funds rate should be. That decision isbased on the health of the economy among other factors. If the economy gets toohot (i.e., U.S. economic growth is robust and jobs are plentiful), inflation begins toaccelerate. Inflation lessens the purchasing power of money over time. The Fed increases interest rates, making it more expensive to borrow money, in order to slowthe economy. If the economy begins to lag, rates are lowered, which theoreticallyspurs expansion of the economy. So, bond traders study the economic data and buy
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WELCOME TO THE STOCK MARKET
and sell bonds accordingly. Sharp drops in the prices of bonds and companion increases in interest rates have, on occasion, triggered sharp drops in stock prices.
The Fed: Nickname for the Federal Reserve Board (FRB), a seven-member groupthat directs the operations of the Federal Reserve System (FRS). Board membersare appointed by the president and are subject to approval by Congress. TheFRS supervises the printing of currency and the regulation of the national moneysupply, examining member banks to ensure they meet various regulations andacting as a clearinghouse for the transfer of funds for the government’s finances.Inflation: Increase in the general price level of goods and services (i.e., yourdollar won’t buy as much as it used to). Inflation is commonly reported usingthe Consumer Price Index (CPI) as a measure. Inflation is one of the major risksto investors over the long term, as savings may actually buy less in the future ifthey are not invested with inflation as a consideration. The inflation rate refersto the rate of change in prices.
The Treasury bond market is important for stock market investors to understand.When investors talk about the bond market, they are referring to the 30-year bondmarket. It serves as a barometer of the expectations as to future trends within theU.S. economy. That is, sophisticated professionals, who spend an inordinateamount of time studying economic data, trade Treasury bonds. Their chief aim inlife is to determine the future direction of interest rates. Recall that when interestrates rise, bond prices fall, and vice versa. If these traders begin to fret about theprospect of higher interest rates, they sell bonds.The determination of the state of the economy and thus interest rates has apowerful effect on the stock market. Sometimes negative economic news willcome out and the markets will climb in reaction. Why the curious reaction to whatappears to be bad news? Simple: If the economy is slowing, interest rates must either come down or stay down longer to keep the economy from going into a recession. Lower rates mean investors need to move further out on the risk/rewardscale to get a good rate of return (as compared to the 30-year bond). If economicnews is good, this could be interpreted as bad for interest rates (meaning they’llrise). This sends bond yields up as investors anticipate rate hikes by the Fed toslow the economy down. If investors can get relatively good rates of return withlittle risk, they’ll take money out of the stock market. So even if you’re interestedin stocks, you have to learn about the bond market to understand why the marketsbehave as they do.The economy affects bond prices, which in turn affect stock prices. Economicreports can sometimes have a profound effect on bond prices. This is why the markets get a little jittery before an economic report is due to be released. Analyzingeconomic data is the only way the Fed can determine how the economy is faring,and thus provide a basis for interest rate policy.
WHY TRADE STOCKS?
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WHY TRADE STOCKS?Without question, there are specific risks associated with owning stocks. If a country goes to war, it might have a direct effect on the profitability of companies andsend their prices down until peace prevails. Assassinations or political events can bea risk to the market. Some stocks also have a liquidity risk (i.e., they are easy to buybut difficult to sell because of an absence of buyers). As you try to sell, the marketmakers keep moving the price lower, and by the time you finally succeed in sellingit, its price has dropped far lower than you care to remember. Therefore, before buying a stock, look at the