Foreign
The definition is obvious. It is a term used for non-US stock. The growth/value and small, medium, large definitions all still apply. If you see the term 'Global' it means that this investment places money world wide, in the USA and elsewhere. There are a few more terms to help define foreign investments:

• Developed countries, like old Europe and Japan
• Developing countries, pretty much Asia but not Japan
• Emerging countries, the terminology is close to developing but includes South America and former Soviet block countries.

Foreign stocks are becoming a much larger part of the investable asset base. In Asset Allocation you will see how foreign stocks can serve to stabilize your portfolio but also add risk due to currency exchange rates.

Our investment industry people sometimes consider investing outside the United States to add risk to a portfolio. It is true that we add what is known as "currency risk" which is the fluctuation of the dollar against the EURO, Pound, Yen, etc. The other concern expressed is that they lack accounting standards and the oversight that exists here in the USA. That may be true, but, after World Com, Enron and AIG, I am not convinced that accounting is too big an issue.

On the other hand, foreign stocks offer additional diversification. In our view, you should have no more than 5% of your total holdings in any one stock and Sir John Templeton said you should have no more than 25% in any one country. We feel you should have part of your portfolio in foreign holdings. Actually we at Juniper Tree are concerned about the strength of the dollar and the increasing interest rates and continue to recommend a higher percent of foreign holdings of both foreign stock and foreign bonds. We are now up to 25 – 30% of investors portfolios.

Indexes
When we turn the TV channel to business news or the nightly news, we invariably hear what the DOW, and NASDAQ and S&P 500 did today. What are they talking about and do we care? Let's define and discuss each one.

"The DOW" is the Dow Jones Industrial Average. Created with a basket of ten individual stocks in 1896 to offer an observer a clearer picture of what the whole market was doing with just one number. It now consists of thirty of the largest industrial stocks. Back then this number represented how much it would cost to buy one share of each of the selected 10 stocks. As time passed and companies came and went, the number of stocks represented grew gradually to 30 and with mergers and splits the value no longer represents the cost of buying one share of each stock. Now it is a point system.

The NASDAQ is a nation wide automated electronic stock reporting system of about 5,000 OTC (over the counter) stocks. This is often called 'tech heavy' as it reflects a lot of technology stocks. This index, like the DOW and S&P is dollar weighted. This means that all stocks are weighted (measured in the index according to their dollar value). The big companies with high capitalization are counted more heavily than the smaller ones. So a move in Microsoft stock moves the entire index much more that some small company would. The top 10-15 dollar value companies in NASDAQ represent something like 20% of the value of the total value of all 5,000 companies counted in the index.

The S&P 500 was developed by Standard and Poors, a company that has measured the performance of US companies since the middle 1800s. In 1957 the company decided that the DOW with only 30 companies listed was not a good measure for our economy. They selected 500 large companies, dollar weighted them, and weight selected from the various sectors in hopes of giving a better economic picture of our country's financial performance. The S&P 500 is commonly seen as 'the' measure for equity performance. If you own an index fund, it is more than likely that you own the S&P 500.

Now days there is an index, representing foreign and domestic for just about anything you may wish to track. The next most commonly cited index may be the Russell 2000 which reflects 2,000 smaller companies.

Exchanges
What is an exchange? In short, it is a system for the organized trading of securities. The major ones are the New Your Exchange, The Chicago Board of Options and the American Stock Exchange. More and more we are moving to electronic trading where a computer matches buys and sells. On the Exchanges there is a person responsible for the orderly trading of every stock traded on that exchange. This person sets the opening price in the morning and through the day can actually buy and sell or hold shares to maintain a balance in the trading. This process is similar throughout the world.

More on Dividends
There is more to understanding dividends than meets the eye. First, a dividend is declared by the company board of directors. At that time they say it will pay a dividend (of so much) to the owner of record on a certain date which is to be paid out on a certain future date. Often the price of a stock that pays a hefty dividend will increase as the payday (owner of record date) approaches and then fall the day after. The drop in value makes sense as the company has just committed to pay out part of its assets. Ex-dividend refers to the first day after the dividend is declared that the stock can be bought and the new owner will not get that dividend. Buying dividends refers to buying a stock near record day to get the dividend, and then selling the stock shortly thereafter. This approach can work with a solid company, but there can be tax consequences.

A company can declare what is known as a 'stock dividend' which means no cash, but instead it rewards you with additional shares of stock based on how many shares you already own.

The board may declare a 'stock split' which means an increase in the number of shares you own.
This is not a taxable event because you have not received any additional value. Example: A declared two for one split means that the one share you owned before is now two shares. The company has twice as many shares issued but the value of the company the next day still the same. So why bother? People tend to prefer to buy stocks in the $20 to $40 range. We seem to like to own at least 100 shares of a stock which is easier to do at $30 than $200 a share. It was once cheaper to buy in 'round lots' of 100 shares, but with electronic trading it is no longer a significant factor. Splits may also infer that the board sees the company as doing well and they expect the stock price to continue to escalate. Studies have attempted to determine whether it is better to buy a stock before or after the split date. In the longer run, no pattern emerged. There is also a "reverse split." This is when a company is in trouble and it declares a reverse split to increase the trading price if its stock. Here you owned 100 shares yesterday and today you have 10 (a one for ten reverse split).

A preferred stock is a class of stock that entitles holders to receive dividends before dividends are paid to common shareholders. This is commonly seen as interest as it is often fixed and at a relatively high rate, but with a maturity years out which adds to its volatility. Compare it to a long term bond. If the company were to get into trouble, the preferred stock holder would be paid back before the common stock holder. It is ranked just below bonds in the pecking order of who gets money back if things go badly. (The bond chapter discusses the entire sequence of priority as to who gets what when a company 'goes under'). Our preferred security could also have the word convertible attached to it, as could other securities. This means that when certain circumstances are met, this security can be "converted" into shares of common stock. There are mutual funds that trade in this kind of product. They are often used to generate current income for the investor.

Puts, calls, straddles and options are terms regarding different ways to leverage the purchase and sale of stocks. You can buy or sell a put or call depending on what you are attempting to accomplish. The most conservative approach is to sell a covered 'call'. Example: You own 500 shares of GE (General Electric Corp), and you do not think the stock is going to do much for the next six months. Someone out there is willing to pay you for the right to 'call away' your 500 shares if it hits a certain higher price. You get a check deposited in your account for the agreed amount. (Generally a dollar or two per share.) There is a time restriction and when that date comes, and you were right, the price didn’t move much, you keep the stock and the option money paid to you. The 'whoops' is if the stock goes up above your call price. You just sold for the higher agreed call price and keep the amount paid to you for the call, but the stock price went above all of that. When you deal with these, an option is 100 shares so in our example, you could sell as many as 5 covered options. Are you getting the idea that these are fairly complex actions and go beyond the scope of this section?

Summary

This chapter is intended to present only an introduction to the concept of stocks. For application of this information as well as that in the bond chapter, you will need to go to the Asset Allocation topic to further help in determining what you should own. Asset Allocation covers the mechanics of investing and the "look fors and the look out fors."

Stocks, bonds, commodities, and real estate are the basic investment tools available to us. It will take this entire web site plus some study fully understand what a stock is, how you can best use it and the risks that stocks pose to us as investors.

Stocks over the years have out preformed bonds and for every rolling periods of around 15 years and they have produced a higher long term return. Note that there have been shorter periods where bonds have done better.

It is important to note that if you project your investments out over a long period of time, a small difference in your rate of return becomes astronomical. This is the 'magic of compounding' which is achieved by reinvesting your dividends and not taking out funds out to pay the taxes. But as you know, stocks will provide this greater return with bumps in the road. The NASDAQ was at 5,000 (+ -) in early 2000 and fell to under 2000 in 2002.