Chapter 2 - All About Marketability And Markets

We live in a "market" economy. If you sell your house, you put it "on the market." You buy groceries in supermarkets. You can buy or sell anything from a pin or a penny oil stock to the Empire State Building. There's a market for almost everything except stupidity. But by far the most accurate and best organized of our markets are those for securities.

One of the things that has popularized security investment is this very factor of marketability. People like to know how much what they have is worth, even when they don't wish either to buy or sell. You call a man a millionaire not on the basis of what he makes a year but on what it is thought he could sell out for. So market value is constantly in our minds, and marketability is one of the essential qualities of the ideal investment.

Marketability actually refers to the quality possessed by anything of being able to be readily bought or sold. It represents no guaranty as to price and in fact almost assures change in price over time, depending upon the number and eagerness of those interested in buying or selling. If you own a rare painting or a woodlot in Georgia, even though either may be intrinsically worth a lot of money, they are not thought of as marketable securities since there are so few possible buyers and even those are unlikely to gather at any particular trading post or marketplace. So a good market depends on there being many buyers and many sellers. This is the basic ingredient of active trading the number of people interested. The markets for the various types of securities described in chapter I are of just two kinds listed and over-the-counter. These markets exist and function for two primary purposes: (1) to provide a meeting place for buyers and sellers where securities may be appraised and where buy and sell orders may be promptly executed at prices fair to both; and (2) to provide orderly, well-regulated markets that respond to day-by-day economic variations and the changing conditions and prospects of each corporation. The response to these variations and changes is reflected in market activity. If there are more buyers than sellers, a stock will go up. If the sellers predominate, the stock will go down. There is only one certainty about markets they will fluctuate!

Features of Stock Exchanges

When we say a stock is "listed," we mean that it is listed or included among those issues traded on a stock exchange. While almost everyone is familiar with the New York Stock Exchange, the most famous securities market in the world, and with the American Stock Exchange (formerly the New York Curb Exchange), few people know that there are sixteen other stock exchanges in the United States. These are usually called regional exchanges as in most instances they specialize in trading in the securities of corporations native to that section of the country. For example, the Salt Lake City Exchange features mining stocks. Other regional exchanges include those in Detroit, Boston, Pacific Coast Stock Exchange and Chicago (Midwest Stock Exchange). In Canada there's the Montreal Stock Exchange and the Canadian Stock Exchange (both in Montreal), the Toronto Stock Exchange (which trades more shares each year than any exchange in the world), and regional exchanges in Calgary, Winnipeg, Edmonton, and Vancouver. North America is by no means the only habitat of exchanges there are very old and famous ones in Europe. The oldest is probably the Frankfurt Stock Exchange which has been doing business for over four hundred years. There are exchanges in London, Amsterdam, Hong Kong, Paris (the Bourse), and Zurich; also much smaller ones in South Africa and Australia. So you see that when we talk about "listed" stocks, we're covering quite a territory.

Reasons (or Listing Securities

Why do we have all these exchanges, and how do they work? We have them to accommodate swiftly changes in ownership in widely held securities. The reason for listing a stock or bond on an exchange is to provide it with a market where people who wish to buy or sell can, through the agency of floor brokers, arrive at a mutually satisfactory price by auction. For example, suppose on the New York Stock Exchange there are 1,000 shares of U. S. Steel offered for sale at 82 and there's a bid of 81M for 1,100 shares. At some point between 8¼ and 82, a compromise price may be agreed upon, and the 1,000 shares will change hands.

Quite naturally on the renowned New York Stock Exchange the shares of some of the largest and best known corporations are traded regularly and actively. This is not only because these enterprises are famous but also because they have so many thousands of stockholders, some wishing to sell and some to buy, every single day. General Motors, General Electric, Wool-worth, Texaco, all have hundreds of thousands of stockholders. American Telephone and Telegraph has close to two million.

Size alone, however, is not the only requirement for listing on the New York Stock Exchange. There are other qualifications. Prior to acceptance for listing, a company must have $8 million or more in net tangible assets, more than 400,000 shares outstanding and not closely held, and 1,500 or more stockholders (owning 100 snares or more). Further, the company must have reported net earnings (after taxes) for a previous year of not less than $1 million. After listing, the company must periodically supply earnings statements, balance sheets, and other financial data. Each exchange has its own particular listing requirements, not usually as comprehensive and formidable, however, as those just recited.

From the company's side, what are the advantages of listing? These: (1) company prestige; (2) daily or frequent trading in its stock with publicly reported prices; (3) superior loan or collateral value of its securities; (4) because its stock becomes well known to investors, new public financing is done more easily and at lower cost; (5) listing makes its shares more acceptable to large individual and institutional investors; and (6) broad active markets attract new stockholders.

As mentioned, listed markets are auction ones. Buyers and sellers meet, through brokers, on the floor of an exchange where, during the official trading hours, shares are sold to the highest bidder. All transactions are immediately reported and recorded, and the total number of shares traded and the price ranges of every issue, every day, are made public. On the New York Stock Exchange, the standard trading unit on most issues is 100 shares; and in bonds, $1,000.

The Over-the-Counter Market

All securities not listed on any exchange trade over-the-counter. This over-the-counter market is actually by far the largest in the world. Because, however, it has no trading arena of its own, because there is no publicity at all about the volume in issues traded, nor any public record of sale prices or daily ranges, the unlisted market is not properly understood or sufficiently appreciated. The over-the-counter market is conducted for the most part over the phone or by teletype, and trades are consummated not only within one city but on a nationwide or even a worldwide basis.

The Over-the-Counter Trader

It is not at all uncommon for a broker in New York to buy from another in Dallas, Chicago, or Los Angeles. There is a national network of dealers several thousand of them. They have no set hours of trading and quite generally start trading before exchanges open and often continue after they have closed. All over-the-counter trades are handled by direct negotiation between dealers. The dealer may act as a principal  buying the security for his own account. In that case, if he resells it to a customer, he will do so at a net price including the addition of a profit for his effort. In such an instance, he becomes in effect a merchant of securities. Dealers also frequently execute over-the-counter orders as brokers, buying at the best obtainable price and charging the customer a standard commission, much as an exchange broker would do. Actually there are brokers who trade exclusively over-the-counter, and there are hundreds of stock exchange member firms which have a special department for handling over-the-counter business. In any event, it is most important that you deal with a reputable broker in over-the-counter transactions. Before you order, get the bid and asked quotations so that you may know the range within which your order should be filled.

Magnitude of Over-the-Counter Market

To give you some idea of the breadth of the unlisted market, we'll make a swift rundown of some of the major issues traded there. Let's start at the top. The largest outstanding marketable securities in America are the obligations of the U. S. Government. While a number of these are listed on the New York Stock Exchange, actually over 95% of all government bonds traded are traded over-the-counter. Next in total financial volume are the municipal issues all the obligations of the fifty states and of the cities, towns, villages, and districts within them. All of these issues of government subdivisions are bought, sold, and quoted over-the-counter. Going beyond the cities and towns, there's another investment zone district obligations. Schools, fire, park, and sewer districts are created to provide particular services in and beyond town and city limits, often spreading over many municipal boundaries.

These districts would never be created or financed if they could not sell their issues in the unlisted market. The obligations of Canada, its Provinces and cities, have the same unlisted trading habitat.

Moving over to stocks, people forget that most blue chip stocks, now among the listed elite, got their start over-the-counter. In point of numbers, whereas about 3,500 issues are listed on major American exchanges, over 40,000 issues are traded or quoted with some frequency over-the-counter. The shares of all of our 14,000 commercial banks, unless locked up among a few individuals, have their market over-the-counter. So do life insurance company stocks such as Aetna, Travelers, Connecticut General, Franklin, and Lincoln Life. The bonds and preferred stocks of thousands of corporations and all mutual fund shares are all over-the-counter items.

The first place where the equity of a company is quoted, when its ownership spreads from a few to a few hundred stockholders, is over-the-counter, and every new issue offered starts out there, even though it may wind up on an exchange later. On the record, there's quite a steady migration from unlisted to listed markets as companies wax great and add thousands of new shareholders.

So you see the over-the-counter and listed markets actually complement each other more than they compete. For example, when the 10,200,000 shares of Ford Motor Company common were publicly offered on January 18, 1956, at 64½, there immediately developed the broadest and most active over-the-counter trading in history. On the day of offering, over 500,000 shares were traded at prices ranging up to a premium of 5¾ points. The issue found its level and got its early seasoning over-the-counter and, in due course, moved over to become a trading favorite on the New York Exchange.

All of the foregoing has been presented to give you background on this whole subject of marketability and to urge you to use both of these markets to your own advantage. Many unheralded, unsung, and undervalued issues, the blue chips of tomorrow, are waiting to be discovered. They may be unlisted but they're certainly not listless. Here is a random selection of over-the-counter issues that don't have to wait to be blue chips. They're there already.

Morgan Guaranty Trust
Macmillan Company
Bank of America
Anheuser-Busch
Dun & Bradstreet
Time, Inc.
Travelers Insurance
McLouth Steel
EH Lilly

Weyerhauser Timber Company Remember, it is the quality and earning power of the stock, not where it trades, that makes it a desirable and rewarding holding.

Resume

1. A choice attribute of a good security is its ready marketability.

2. Markets are of two kinds listed and unlisted (over-the-counter).

3. Advantages of listing include prestige, more active and closer trading markets, superior collateral value, and public record of all transactions.

4. Over-the-counter, the broadest and most panoramic market but without any trading headquarters, embraces not only some of the finest securities but the most speculative promotions.

5. All new issues start out over-the-counter.

6. Both markets are essential, and prudent selection of securities in each can add to your income and capital.

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