Stock Exchanges is the place where most stocks are traded and
to decide on a price, buyers and sellers meet. 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 types of stock exchanges are a virtual kind,
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, 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.
Difference between Primary Market and Secondary Market
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 IPO) while, 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.
New York Stock Exchange
The New York Stock Exchange The most prestigious exchange in
the world is the New York Stock Exchange (NYSE). 24 New
York City stockbrokers and merchants founded the "Big
Board" over 200 years ago in 1792 with the signing of the Buttonwood Agreement.
Currently the NYSE, with stocks like General Electric, McDonald's, Citigroup,
Coca-Cola, Gillette, and Wal-mart, is the market of choice for the largest
companies in America.
The NYSE is the first type of exchange (as we referred to
above), where much of the trading is done face-to-face on a trading floor. This
is also referred to as a "listed" exchange.
Orders come in through members
of the exchange brokerage firms 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" 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. 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.
NASDAQ Stock Exchange
The second type of exchange is the virtual sort called an
over-the-counter (OTC) market, of which the NASDAQ is the most popular.
These
markets have no central location or floor brokers whatsoever. Trading is done
through a computer and telecommunications network of dealers.
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.
Other Stock Exchanges
The third largest exchange in the U.S.
is the American Stock Exchange (AMEX). The AMEX used to be an alternative to
the NYSE, but the NASDAQ has since filled that role. In fact, the National
Association of Securities Dealers (NASD), which is the parent of NASDAQ, bought
the AMEX in 1998.
Almost all trading now on the AMEX is in small-cap stocks
and derivatives. 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. We've got a complete list of exchanges from
around the world here. 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 burnt! Chances are, if you're
reading this tutorial you don't want even to consider the OTCBB.
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