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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.
By selling
stock, the company is selling ownership of the company to the
public. When a company reaches a certain stage in its growth, it
may decide to issue stock, or go public, with an initial public
offering (IPO). The goal may be to raise capital, to provide
liquidity for the existing shareholders, or a number of other
reasons. Any company planning an IPO must register its offering
with the Securities and Exchange Commission (SEC).
Every
company whose stock trades publicly at one time or another had an
IPO. It gave some of the stock to previous investors to compensate
them, and gave some of the stock to an investment banker who
helped with the IPO, and it sold some of the stock to the public.
When the company received the money for the stock it sold, it then
used that money to continue to invest in its own growth.
The purpose of a stock market is to facilitate the exchange of securities
between buyers and sellers, thus 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.
Before we go on, we should distinguish between the "primary" market and the
"secondary" market. The primary market is where securities are created by means
of an Initial Public Offering (IPO). In
the secondary market, investors trade previously-issued securities without the
involvement of the issuing-companies. The secondary market is what people are
referring to when they talk about "the stock market." It is important to
understand that the trading of a company's stock does not directly involve that
company.
The New York Stock Exchange (NYSE) - The NYSE is the largest equity
exchange in the world. Founded in 1792 with the signing of the Buttonwood
Agreement by 24 New York City stockbrokers and merchants, it adopted its
constitution in 1817 and its current name in 1863. The NYSE has a global market
capitalization of over $15 trillion. Common and preferred stock, bonds,
warrants, and rights are all traded on the NYSE, which is also known as the Big
Board.
The trading
floor of the NYSE
The NYSE is the
first type of exchange, where much of the trading is
done face-to-face on a trading floor. This is also referred to as a "listed"
exchange. Most trading is conducted by brokers acting on behalf of customers,
rather than by dealers trading for their own account. For this reason, the NYSE
is often described as an agency auction market. Customer's orders come in through brokerage firms that are members of the
exchange and flow down to floor brokers who go to a specific spot on the floor
where the stock trades. At this location, known as the trading post, there is a
specific person known as the "specialist"
(NYSE-assigned dealers, known as specialists, are responsible for maintaining a
fair and orderly market in the securities assigned to them) whose job is to match buyers and sellers. Prices are determined using an auction
method: the current price is the highest amount any buyer is willing to pay and
the lowest price at which someone is willing to sell. Once a trade has been
made, the details are sent back to the brokerage firm, who then notifies the
investor who placed the order. Liquidity in the NYSE auction market system is
provided by individual and institutional investors, member firms trading for
their own accounts, and assigned specialists. The NYSE is linked with other
markets trading listed securities through the Intermarket Trading System (ITS).
The interaction of natural buyers and sellers determines the price of a
NYSE-listed stock. Although there is human contact in this process,
don't think that the NYSE is still in the stone age; computers do play a huge
role in the process.
**Recommended Reading**
The Day Trader's Survival Guide:
Even though the book is geared towards daytraders, this book is excellent
in explaining how the different exchanges works and why NYSE is more
efficient market and why you should use limit orders.
The Nasdaq -
The second type of exchange is the virtual sort called an over-the-counter
(OTC) market, of which the Nasdaq is the most
popular. NASDAQ, or the National Association of Securities Dealers Automated
Quotation system, is a computerized stock trading network that allows brokers to
get price quotations for stocks being traded electronically or sold on the floor
of a stock exchange. It
used to be that the largest companies were listed only on the NYSE while all
other "second tier" stocks traded on the other exchanges. The tech boom of the
late 90s changed all this; now the Nasdaq is home to several big technology
companies such as Microsoft, Cisco, Intel, Dell, and Oracle. This has resulted
in the Nasdaq becoming a serious competitor to the NYSE.
On the Nasdaq, brokerages act as "market
makers" for various stocks. A market maker provides continuous
bid and ask prices within a
prescribed percentage spread for shares for which they are designated to make a market. They may
match up buyers and sellers directly but usually they will maintain an inventory
of shares to meet demands of investors.
American Stock Exchange (AMEX) and
other exchanges - AMEX is the second-largest
floor-based stock exchange in the US. The AMEX operates a central auction market
in stocks (including a large number of overseas stocks), exchange traded funds (ETFs),
and derivatives, including options on many NYSE-traded and over-the-counter
(OTC) stocks. It also used to be an alternative to the NYSE, but that role has since been
replaced by the Nasdaq. In fact, the National Association of
Securities Dealers (NASD), which is the parent of Nasdaq, bought the AMEX in
1998.
There are many stock exchanges located in just about every country around the
world. American markets are undoubtedly the largest and thus most important, but
they still represent only a fraction of total investment around the globe. The
two other main financial hubs are London, home of the London Stock Exchange, and
Hong Kong, home of the Hong Kong Stock Exchange.
The last place worth mentioning is the over-the-counter bulletin board (OTCBB).
The Nasdaq technically is an over-the-counter market, but the term commonly
refers to small public companies that don’t meet the listing requirements of any
of the regulated markets, including the Nasdaq. The OTCBB is home to
penny stocks
because there is little to no regulation. This makes investing in an OTCBB stock
very risky. You really need to know what you're doing here or you'll get hurt
bad financially!
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
