STOCK EXCHANGE:

INTRODUCTION

A stock exchange, share market or bourse is a corporation or mutual organization which provides
"trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities as well as other
financial instruments and capital events including the payment of income and dividends. The
securities traded on a stock exchange include: shares issued by companies, unit trusts and other
pooled investment products and bonds. To be able to trade a security on a certain stock
exchange, it has to be listed there. Usually there is a central location at least for recordkeeping,
but trade is less and less linked to such a physical place, as modern markets are electronic
networks, which gives them advantages of speed and cost of transactions. Trade on an exchange
is by members only. The initial offering of stocks and bonds to investors is by definition done in
the primary market and subsequent trading is done in the secondary market. A stock exchange is
often the most important component of a stock market. Supply and demand in stock markets are
driven by various factors which, as in all free markets, affect the price of stocks (see stock
valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.
This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global
market for securities.

History of Stock Exchanges:

In 11th century France the courtiers de change were concerned with managing and regulating the
debts of agricultural communities on behalf of the banks. As these men also traded in debts, they
could be called the first brokers.
Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a
bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the
front of the house where merchants met.

However, it is more likely that in the late 13th century commodity traders in Bruges gathered
inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now
informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and
neighboring counties and "Bourses" soon opened in Ghent and Amsterdam.

The house of the Beurze family on Vlaamingstraat Bruges was the site of the worlds first stock
Exchange, circa 1415. The term Bourse is believed to have derived from the family name
Beurze.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In
1351, the Venetian Government outlawed spreading rumors intended to lower the price of
government funds. There were people in Pisa, Verona, Genoa and Florence who also began
trading in government securities during the 14th century. This was only possible because these
were independent city states ruled by a council of influential citizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest in business ventures
and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first
shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In
1688, the trading of stocks began on a stock exchange in London.

Online Stock Exchange:

A stock exchange is simply a market that is designed for the sale and purchase of securities of
corporations and municipalities. A stock exchange sells and buys stocks, shares, and other such
securities. In addition, the stock exchange sometimes buys and sells certificates representing
commodities of trade. This article discusses:

 What is the principle behind the operation of stock exchanges?

 What are the functions and processes involved in stock exchanges?
  Know in detail about major stock exchanges

Understanding what a stock exchange is and how an online stock exchange works, can help you
make the right decisions when it comes to your investment. Being able to follow the NY stock
exchange and being able to understand the NASDAQ stock exchange numbers that appear on
your news every evening can help you become a better investor and can help you profit more
from the stock market.

How Does A Stock Exchange Work?

The buying and selling of stocks at the exchange is done on an area which is called the floor. All
over the floor are positions which are called posts. Each post has the names of the stocks traded
at that specific post. If a broker wants to buy shares of a specific company they will go to the
section of the post that has that stock. If the broker sees at the price of the stock is not quite what
the broker is authorized to pay, a professional called the specialist may receive an order. The
specialist will often act as a go-between between the seller and buyer. What the specialist does is
to enter the information from the broker into a book. If the stock reaches the required price, the
specialist will sell or buy the stock according to the orders given to them by the broker. The
transaction is then reported to the investor.

If a broker approaches a post and sees that the price of the stock is what they are authorized to
pay, the broker can complete the transaction themselves. As soon as a transaction occurs, the
broker makes a memorandum and reports it to the brokerage office by telephone instantly. At the
post, an exchange employee jots down on a special card the details of the transaction including
the stock symbol, the number of shares, and the price of the stocks. The employee then puts the
card into an optical reader. The reader puts this information into a computer and transmits the
information of the buy or sell of the stock to the market. This means that information about the
transaction is added to the stock market and the transaction is counted on the many stock market
tickers and information display devices that investors rely on all over the world. Today, markets
are instantly linked by the Internet, allowing for faster exchange.

How does a stock exchange operate and how a transaction is made there?
Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide
on a price. Some exchanges are physical locations where transactions are carried out on a trading
floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their
arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual,
composed of a network of computers where trades are made electronically.

The purpose of a stock market is to facilitate the exchange of securities between buyers and
sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you
had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing
more than a super-sophisticated farmers' market linking buyers and sellers.

What are the different types of stocks available in the market?

There are different types of stocks to choose in the stock market. While you do not necessarily
have to be an expert on all the types of stocks available in stock market content, being able to
differentiate and choose stocks is crucial to stock market investing. This article helps you to
know more on:

 What re the various types of stocks available?

 What are the features of preferred stocks?
 What are the characteristics of blue chip stocks?

There are different types of stocks to choose in the stock market. While you do not necessarily
have to be an expert on all the types of stocks available in stock market content, being able to
differentiate and choose stocks is crucial to stock market investing. Depending on your goals and
your investment, you may simply find that some stocks are better suited to your needs than
others. At the very least, being able to tell the difference between preferred and common stocks
can help you get started in investing.

Preferred Stocks and Common Stocks:

All stocks are generally designated as preferred or common. Common stocks are stocks that offer
you a bit of ownership of a company. Each common stock you have offers you a specific amount
of ownership, entitles you to some dividends and allows you one vote for each share you own in
electing directors or making key business decisions. Common stocks in this sense are different
from debentures or bonds, which are money given to a company as a loan in return for the
promise of specific interest.

Preferred stock offers you preferential treatment when it comes to paying out of dividends. If the
company goes bankrupt, stocks holders holding preferred equities get faster access to any assets
not used towards paying debts. If you have preferred cumulative stock, your position is secure.
This type of stock allows unpaid dividends to be accrued. If a company cannot pay dividends one
year, your dividends accrue until the company can pay. During such period all the money owed
over the previous years will be paid. Those holding preferred types of stock usually have no
voting ability and these stocks only get their pre-determined dividend and not more than that.
This is to offset the other advantages of preferred status.

Growth Stocks:

Growth stocks are stocks of companies that are experiencing rapid growth and are expected to
continue growing in the future. A company with growth stocks is generally a stable company that
is experiencing larger sales as well as incurring reasonable expenses. Such a company invests
money in new products. These stocks are attractive to investors since they allow investors to
make money from a growing and prospering company. However, these stocks can also be a risk.
These stocks are often expensive, and of course there is no guarantee that a company will
continue to grow and prosper as projected

What Are Dividend Stocks?

Dividend stocks are those stocks that pay a yearly dividend or cash amount in addition to having
an inherent buying and selling value. Having high dividend stocks means that you make money
each year that a company profits. This article takes you through:

Dividend stocks are those stocks that pay a yearly dividend or cash amount in addition to having
an inherent buying and selling value. Having high dividend stocks means that you make money
each year that a company profits. The best dividend stocks are used by wealthy people in order to
create a passive income. Thanks to the Internet, almost any investor can start investing in these
stocks. It is easy to find a list of dividend paying stocks and even get newsletters that feature
monthly dividend stocks right in your mailbox or email inbox. If you want to make money
regularly from your investments, as well as make money when buying and selling your
securities, dividend yielding stocks may be the solution.

The Importance of the Stock Exchange:

Stock exchanges perform important roles in national economies. Most importantly, they
encourage investment by providing places for buyers and sellers to trade securities. This
investment, in turn, enables corporations to obtain funds to expand their businesses.

Corporations issue new securities in what is known as the primary market, usually with the help
of investment bankers (see Investment Banking). The investment bank acquires the initial issue
of the new securities from the corporation at a negotiated price and then makes the securities
available for its clients and other investors in an initial public offering (IPO). In this primary
market, corporations receive the proceeds of security sales. After this initial offering the
securities are bought and sold in the secondary market. The corporation is not usually involved in
the trading of its stock in the secondary market. Stock exchanges essentially function as
secondary markets. By providing investors the opportunity to trade financial instruments, the
stock exchanges support the performance of the primary markets. This arrangement makes it
easier for corporations to raise the funds that they need to build and expand their businesses.

Although corporations do not directly benefit from secondary market transactions, the
managers of a corporation closely monitor the price of the corporation's stock in secondary
markets. One reason for this concern involves the cost of raising new funds for further business
expansion. The price of a company's stock in the secondary market influences the amount of
funds that can be raised by issuing additional stock in the primary market.

Corporate managers also pay attention to the price of the company's stock in secondary markets
because it affects the financial wealth of the corporation's owners—the stockholders. If the price
of the stock rises, then the stockholders become wealthier. This is likely to make them happy
with the company's management. Typically, managers own only small amounts of a
corporation's outstanding shares. If the price of the stock declines, the shareholders become less
wealthy and are likely to be unhappy with management. If enough shareholders become
unhappy, they may move to replace the corporation's managers. Most corporate managers also
receive options to buy company stock at a selected price, so they are motivated to increase the
value of the stock in the secondary market.

Stock exchanges encourage investment by providing this secondary market. Stock exchanges
also encourage investment in other ways. They protect investors by upholding rules and
regulations that ensure buyers will be treated fairly and receive exactly what they pay for.
Exchanges also support state-of-the-art technology and the business of brokering. This support
helps traders buy and sell securities quickly and efficiently. Of course, being able to sell a
security in the secondary market increases the relative safety of investing because investors can
unload a stock that may be on the decline or that faces an uncertain future.

The Role of Stock Exchanges:

Raising capital for businesses

A stock exchange provides companies with the facility to raise capital for expansion through
selling shares to the investing public.[16]

Common forms of capital raising

Besides the borrowing capacity provided to an individual or firm by the banking system, in the
form of credit or a loan, there are four common forms of capital raising used by companies and
entrepreneurs. Most of these available options might be achieved, directly or indirectly, through
a stock exchange.

Going public

Capital intensive companies, particularly high tech companies, always need to raise high
volumes of capital in their early stages. For this reason, the public market provided by the stock
exchanges has been one of the most important funding sources for many capital intensive
startups. After the 1990s and early-2000s hi-tech listed companies' boom and bust in the world's
major stock exchanges, it has been much more demanding for the high-tech entrepreneur to take
his/her company public, unless either the company already has products in the market and is
generating sales and earnings, or the company has completed advanced promising clinical trials,
earned potentially profitable patents or conducted market research which demonstrated very
positive outcomes. This is quite different from the situation of the 1990s to early-2000s period,
when a number of companies (particularly Internet boom and biotechnology companies) went
public in the most prominent stock exchanges around the world, in the total absence of sales,
earnings and any well-documented promising outcome. Anyway, every year a number of
companies, including unknown highly speculative and financially unpredictable hi-tech startups,
are listed for the first time in all the major stock exchanges – there are even specialized entry
markets for these kind of companies or stock indexes tracking their performance (examples
include the Alternext, CAC Small, SDAX, TecDAX, or most of the third market good
companies).

Limited partnerships

A number of companies have also raised significant amounts of capital through R&D limited
partnerships. Tax law changes that were enacted in 1987 in the United States changed the tax
deductibility of investments in R&D limited partnerships. In order for a partnership to be of
interest to investors today, the cash on cash return must be high enough to entice investors.

Venture capital

A third usual source of capital for startup companies has been venture capital. This source
remains largely available today, but the maximum statistical amount that the venture company
firms in aggregate will invest in any one company is not limitless (it was approximately $15
million in 2001 for a biotechnology company).

Corporate partners

A fourth alternative source of cash for a private company is a corporate partner, usually an
established multinational company, which provides capital for the smaller company in return for
marketing rights, patent rights, or equity. Corporate partnerships have been used successfully in a
large number of cases.

Mobilizing savings for investment

When people draw their savings and invest in shares (through an IPO or the issuance of new
company shares of an already listed company), it usually leads to rational allocation of resources
because funds, which could have been consumed, or kept in idle deposits with banks, are
mobilized and redirected to help companies' management boards finance their organizations.
This may promote business activity with benefits for several economic sectors such as
agriculture, commerce and industry, resulting in stronger economic growth and higher
productivity levels of firms.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution

channels, hedge against volatility, increase their market share, or acquire other necessary
business assets. A takeover bid or a merger agreement through the stock market is one of the
simplest and most common ways for a company to grow by acquisition or fusion.

Profit sharing

Both casual and professional stock investors, as large as institutional investors or as small as an
ordinary middle-class family, through dividends and stock price increases that may result in
capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses
may result in capital losses for shareholders.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve management
standards and efficiency to satisfy the demands of these shareholders and the more stringent rules
for public corporations imposed by public stock exchanges and the government. Consequently, it
is alleged that public companies (companies that are owned by shareholders who are members of
the general public and trade shares on public exchanges) tend to have better management records
than privately held companies (those companies where shares are not publicly traded, often
owned by the company founders, their families and heirs, or otherwise by a small group of
investors).

Despite this claim, some well-documented cases are known where it is alleged that there has
been considerable slippage in corporate governance on the part of some public companies. The
dot-com bubble in the late 1990s, and the subprime mortgage crisis in 2007–08, are classical
examples of corporate mismanagement. Companies like Pets.com (2000), Enron (2001), One.Tel
(2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat
(2003), American International Group (2008), Bear Stearns (2008), Lehman Brothers (2008),
General Motors (2009) and Satyam Computer Services (2009) were among the most widely
scrutinized by the media.

To assist in corporate governance many banks and companies worldwide utilize securities
identification numbers (USIN) to identify, uniquely, their stocks, bonds and other securities.
Adding an ISIN code helps to distinctly identify securities and the ISIN system is used
worldwide by funds, companies, and governments.

However, when poor financial, ethical or managerial records are known by the stock investors,
the stock and the company tend to lose value. In the stock exchanges, shareholders of
underperforming firms are often penalized by significant share price decline, and they tend as
well to dismiss incompetent management teams.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to
both the large and small stock investors because a person buys the number of shares they can
afford. Therefore, the Stock Exchange provides the opportunity for small investors to own shares
of the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money to finance infrastructure projects
such as sewage and water treatment works or housing estates by selling another category of
securities known as bonds. These bonds can be raised through the stock exchange whereby
members of the public buy them, thus loaning money to the government. The issuance of such
bonds can obviate, in the short term, direct taxation of citizens to finance development—though
by securing such bonds with the full faith and credit of the government instead of with collateral,
the government must eventually tax citizens or otherwise raise additional funds to make any
regular coupon payments and refund the principal when the bonds mature.

Stock exchanges have multiple roles in the economy, this may include the following:

Barometer of the economy:

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share
prices tend to rise or remain stable when companies and the economy in general show signs of
stability and growth. An economic recession, depression, or financial crisis could eventually lead
to a stock market crash. Therefore the movement of share prices and in general of the stock
indexes can be an indicator of the general trend in the economy.

Listing Requirements:

Listing requirements are the set of conditions imposed by a given stock exchange upon
companies that want to be listed on that exchange. Such conditions sometimes include minimum
number of shares outstanding, minimum market capitalization, and minimum annual income.

Requirements by stock exchange:

Companies have to meet the requirements of the exchange in order to have their stocks and
shares listed and traded there, but requirements vary by stock exchange:

 London Stock Exchange: The main market of the London Stock Exchange has
requirements for a minimum market capitalization (£700,000), three years of audited
financial statements, minimum public float (25 per cent) and sufficient working capital
for at least 12 months from the date of listing.
  NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at
least 1.25 million shares of stock worth at least $70 million and must have earned more
than $11 million over the last three years.
 New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), for
example, a company must have issued at least a million shares of stock worth $100
million and must have earned more than $10 million over the last three years.
 Bombay Stock Exchange:
Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of
Rs.250 Million and minimum public float equivalent to Rs.100 Million.

Ownership:

Stock exchanges originated as mutual organizations, owned by its member stock brokers. There
has been a recent trend for stock exchanges to demutualize, where the members sell their shares
in an initial public offering. In this way the mutual organization becomes a corporation, with
shares that are listed on a stock exchange. Examples are Australian Securities Exchange (1998),
Euronext (merged with New York Stock Exchange), NASDAQ (2002), the New York Stock
Exchange (2005), Bolsas y Mercados Españoles, and the São Paulo Stock Exchange (2007).

Other Types of Exchanges:

In the 19th century, exchanges were opened to trade forward contracts on commodities.
Exchange traded forward contracts are called futures contracts. These commodity exchanges
later started offering future contracts on other products, such as interest rates and shares, as well
as options contracts. They are now generally known as futures exchanges.

The Future of Stock Exchanges:

The future of stock trading appears to be electronic, as competition is continually growing

between the remaining traditional New York Stock Exchange
specialist system against the relatively new, all Electronic Communications Networks, or ECNs.
ECNs point to their speedy execution of large block trades, while specialist system proponents
cite the role of specialists in maintaining orderly markets, especially under extraordinary
conditions or for special types of orders.

The ECNs contend that an array of special interests profit at the expense of investors in even the
most mundane exchange-directed trades. Machine-based systems, they argue, are much more
efficient, because they speed up the execution mechanism and eliminate the need to deal with an
intermediary.

Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all
exchanges) has been slow to respond to technological innovation. Conversion to all-electronic
trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs
traders."

William Lupien, founder of the Instinet trading system and the OptiMark system, has been
quoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fast once you
reach the tipping point. We're now at the tipping point."

Congress mandated the establishment of a national market system of multiple exchanges in 1975.
Since then, ECNs have been developing rapidly.[citation needed]

One example of improved efficiency of ECNs is the prevention of front running, by which
manual Wall Street traders use knowledge of a customer's incoming order to place their own
orders so as to benefit from the perceived change to market direction that the introduction of a
large order will cause. By executing large trades at lightning speed without manual intervention,
ECNs make impossible this illegal practice, for which several NYSE floor brokers were
investigated and severely fined in recent years. Under the specialist system, when the market
sees a large trade in a name, other buyers are immediately able to look to see how big the trader
is in the name, and make inferences about why s/he is selling or buying. All traders who are
quick enough are able to use that information to anticipate price movements.

ECNs have changed ordinary stock transaction processing (like brokerage services before them)
into a commodity-type business. ECNs could regulate the fairness of initial public offerings
(IPOs), oversee Hambrecht's OpenIPO process, or measure the effectiveness of securities
research and use transaction fees to subsidize small- and mid-cap research efforts.

Some[who?], however, believe the answer will be some combination of the best of technology and
"upstairs trading" — in other words, a hybrid model.

Trading 25,000 shares of General Electric stock (recent[when?] quote: $34.76; recent[when?] volume:
44,760,300) would be a relatively simple e-commerce transaction; trading 100 shares of
Berkshire Hathaway Class A stock (recent quote: $139,700.00; recent volume: 850) may never
be. The choice of system should be clear (but always that of the trader), based on the
characteristics of the security to be traded.

Even with ECNs forming an important part of a national market system, opportunities
presumably remain to profit from the spread between the bid and offer price. That is especially
true for investment managers that direct huge trading volume, and own a stake in an ECN or
specialist firm. For example, in its individual stock-brokerage accounts, "Fidelity Investments
runs 29% of its undesignated orders in NYSE-listed stocks, and 37% of its undesignated market
orders through the Boston Stock Exchange, where an affiliate controls a specialist post."

Fidelity says these arrangements are governed by a separate brokerage "order-flow management"
team, which seeks to obtain the best possible execution for customers, and that its execution is
highly rated.

Valuation Methods:

Gordon model:

Gordon growth model is a variant of the Discounted cash flow model, a method for valuing a
stock or business. Often used to provide difficult-to-resolve valuation issues for litigation, tax
planning, and business transactions that are currently off market. It is named after Myron
Gordon, who was a professor at the University of Toronto.

It assumes that the company issues a dividend that has a current value of D that grows at a
constant rate g. It also assumes that the required rate of return for the stock remains constant at k
which is equal to the cost of equity for that company. It involves summing the infinite series
which gives the value of price current P.

.
Summing the infinite series we get,

， In practice this P is then adjusted by various factors e.g. the size of the company.

， k denotes expected return = yield + expected growth.

It is common to use the next value of D given by D1 = D0(1 + g), thus the Gordon's model can be
stated as [1]

Note that the model assumes that the earnings growth is constant for perpetuity. In practice a
very high growth rate cannot be sustained for a long time. Often it is assumed that the high
growth rate can be sustained for only a limited number of years. After that only a sustainable
growth rate will be experienced. This corresponds to the terminal case of the Discounted cash
flow model. Gordon's model is thus applicable to the terminal case.

Problems with the model:

a) The model requires one perpetual growth rate

 greater than (negative 1) and

 less than the cost of capital.

But for many growth stocks, the current growth rate can vary with the cost of capital
significantly year by year. In this case this model should not be used.

b) If the stock does not currently pay a dividend, like many growth stocks, more general versions
of the discounted dividend model must be used to value the stock. One common technique is to
assume that the Miller-Modigliani hypothesis of dividend irrelevance is true, and therefore
replace the stocks's dividend D with E earnings per share.
But this has the effect of double counting the earnings. The model's equation recognizes the trade
off between paying dividends and the growth realized by reinvested earnings. It incorporates
both factors. By replacing the (lack of) dividend with earnings, and multiplying by the growth
from those earnings, you double count.

c) Gordon's model is sensitive if k is close to g. For example, if

 dividend = $1.00
 cost of capital = 8%

Say the

 growth rate = 1% - 2%

So the price of the stock

 assuming 1% growth= $14.43 = 1.00(1.01/.07)

 assuming 2% growth= $17.00 = 1.00(1.02/.06)

The difference determined in valuation is relatively small.

Now say the

 growth rate = 6% - 7%

So the price of the stock

 assuming 6% growth= $53 = 1.00(1.06/.02)

 assuming 7% growth= $107 = 1.00(1.07/.01)

The difference determined in valuation is large.

Derivation:

We want to find out the value of Pn as , where

Let

.Then

.Since

we get

.Therefore,

If g < k, then a < 1 and

as .

Thus, we get

Dividend yield:

The dividend yield on a company stock is the company's annual dividend payments divided by
its market cap, or the dividend per share divided by the price per share. It is often expressed as a
percentage.

Preferred share dividend yield:

Dividend payments on preferred shares are stipulated by the prospectus. The company will
typically refer to a preferred share by its initial name which is the yield on its original price —
for example, a 6% preferred share. However, the price of preferred shares varies according to the
market so the yield based on the current price fluctuates. Owners of preferred shares calculate
multiple yields to reflect the different possible outcomes over the life of the security.

 current yield is the $Dividend / Pfd share current price.

 Since the share may be purchased at a lower (higher) cost than its final redemption value,
holding it to maturity will result in a capital gain (loss). The annualized rate of gain is
calculated using the Present value of a dollar calculation. ('PV' is the current stock price.
'FV' is the redemption value. 'n' is the number of years to redemption. Solve for the
 interest rate 'r'.) The yield to maturity is the sum of this annualized gain (loss) and the
current yield.
 There are other possible yields discussed at Yield to maturity.

Common share dividend yield:

Unlike preferred stock, there is no stipulated dividend for common stock. Instead, dividends paid
to holders of common stock are set by management, usually in relation to the company's
earnings. There is no guarantee that future dividends will match past dividends or even be paid at
all. Due to the difficulty in accurately forecasting future dividends, the most commonly-cited
figure for dividend yield is the current yield which is calculated using the following formula:

For example, take a company which paid dividends totaling $1 last year and whose shares
currently sell for $20. Its dividend yield would be calculated as follows:

Rather than use last year's dividend, some try to estimate what the next year's dividend will be
and use this as the basis of a future dividend yield. Such a scheme is used for the calculation of
the FTSE UK Dividend+ Index[1]. It should be noted that estimates of future dividend yields are
by definition uncertain.

History:

Historically, a higher dividend yield has been considered to be desirable among investors. A high
dividend yield can be considered to be evidence that a stock is under priced or that the company
has fallen on hard times and future dividends will not be as high as previous ones. Similarly a
low dividend yield can be considered evidence that the stock is overpriced or that future
dividends might be higher.
Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis
on price appreciation over dividends as the main form of return on investments.

The importance of the dividend yield in determining investment strength is still a debated topic.
The persistent historic low in the Dow Jones dividend yield during the early 21st century is
considered by some bearish investors as indicative that the market is still overvalued.

Dow Industrials:

The dividend yield of the Dow Jones Industrial Average, which is obtained from the annual
dividends of all 30 companies in the average divided by their cumulative stock price, has also
been considered to be an important indicator of the strength of the U.S. stock market.
Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs,
for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones
dividend yield occurred during the stock market collapse of 1932, when it exceeded 15%.

With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield
has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during
the stock market peak of 2000.

S&P 500:

In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the
dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices
increased faster than dividend payments from earnings, and public company
earnings increased slower than stock prices. During the 20th century, the highest growth rates for
earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for
earnings[citation needed]. As of 2008, the average dividend yield is around 2%.

Earnings per share:

Earnings per share (EPS) are the earnings returned on the initial investment amount.

In the US, the Financial Accounting Standards Board (FASB) requires companies' income
statements to report EPS for each of the major categories of the income statement: continuing
operations, discontinued operations, extraordinary items, and net income.

Calculating EPS:

The EPS formula does NOT include preferred dividends for categories outside of continued
operations and net income. Earnings per share for continuing operations and net income are more
complicated in that any preferred dividends are removed from net income before calculating
EPS. Remember that preferred stock rights have precedence over common stock. If preferred
dividends total $100,000, then that is money not available to distribute to each share of common
stock.

Ownership

Stock exchanges originated as mutual organizations, owned by its member stock brokers. There
has been a recent trend for stock exchanges to demutualize, where the members sell their shares
in an initial public offering. In this way the mutual organization becomes a corporation, with
shares that are listed on a stock exchange. Examples are Australian Securities Exchange (1998),
Euronext (merged with New York Stock Exchange), NASDAQ (2002), Bursa Malaysia (2004),
the New York Stock Exchange (2005), Bolsas y Mercados Españoles, and the São Paulo Stock
Exchange (2007). The Shenzhen and Shanghai stock exchanges can be characterized as quasi-
state institutions insofar as they were created by government bodies in China and their leading
personnel are directly appointed by the China Securities Regulatory Commission. Another
example is Tashkent republican stock exchange (Uzbekistan) established in 1994, three years
after collapse of Soviet Union, mainly state-owned but has a form of a public corporation (joint
stock company). According to an Uzbek government decision (March 2012) 25 percent minus
one share of Tashkent stock exchange was expected to be sold to Korea Exchange(KRX) in
2014.[20]