Types of Stock Markets

Stocks are traded on exchanges, places where sellers and buyers negotiate a price. Exchanges can be physical locations where transactions occur on the famous trading floors. Exchanges can also be located virtually and conducted electronically with computers. These exchanges are the lifeblood of the stock market, which is where securities are bought and sold. Stock markets facilitate this transaction in order to reduce the risk of investing.

Securities are created on the primary market. Here, public sector institutions, companies, and governments obtain funding after selling a stock or bond through a syndicate of securities dealers. The sale is called an initial public offering and the process is called underwriting.

The secondary market is where investors trade securities without the involvement of the issuing companies. When people refer to the stock market, they are in fact referring to the secondary market where these previously issued securities are sold and transferred from one investor to another. The secondary market is far more liquid than the primary one, as well.

New York Stock Exchange
Founded in 1792, the New York Stock Exchange is the market of choice for most of America’s largest corporations including Wal-mart, McDonald’s and General Electric. Most of the trading occurs in person on the trading floor. Prices are determined with an auction method – the highest amount a purchaser will spend and the lowest amount a party will sell – and once the trade is made, the details are sent to the brokerage firm who contacts the investor about the order. An individual known as the specialist is responsible for matching the buyers and sellers. Presently, virtually all but the highest priced stocks can be traded electronically. Customers can send route orders to the floor for trade or directly send in orders for immediate execution.

Nasdaq
Nasdaq is a mostly virtual market that has no central location or floor brokers. Instead, trading is conducted electronically. 5,000 of the more actively traded over-the-counter stocks are traded on Nasdaq. After the tech boom of the 1990s, Nasdaq became home to numerous large technology firms i.e. Oracle, Dell, and Microsoft. Market makers act as specialists, as they match up buyers and sellers directly; in addition, market makers preserve an inventory of snares to meet investor demands.

Firms that wish to qualify for listing on the exchange must be registered with the SEC, have at least three financial firms to act as brokers for special securities, and meet minimum requirements for public shares, capital, and shareholders.

Other Exchanges
Other exchanges include the American Stock Exchange, which generally deals with derivatives, where the price depends upon one or more underlying assets, and small cap stocks, which includes stocks with a relatively small market capitalization.

There are other global stock exchanges that represent much of the total global investment. The London Stock Exchange, Frankfurt Stock Exchange, and Hong Kong Stock Exchange are, in particular, powerful exchanges where billions in stocks are transacted every day.

How Mutual Funds Work

Over 80 million people in America alone have investments in mutual funds. While stock markets generally yield a better return than mutual funds, the mutual fund managers have a certain experience and knowledge that laymen may not be able to muster. Investors can often rely on their managers’ understanding the market. It is optimal for mutual funds to be invested within domestic and foreign stock mutual funds, fixed-income mutual funds, or income fund equivalents.

History of Mutual Funds
Mutual funds grew popular in the mid 1980s when investors realized that pooling assets together could result in overall lower risks with moderate returns. In fact, such investments have been around for several hundred years. Mutual funds originated in 1774, when Adriaan van Ketwich convinced investors to pool their investments together and minimize risk so that the poor and middle class could contribute. While there were varying kinds of mutual and investment funds in the 19th century Holland, Scotland, and United States, the first modern mutual fund was created in 1924 and went public in 1928. The stock market crash of 1929 resulted in many of the then 700 closed-end funds losing their popularity while the small open-end funds grew in popularity. The Securities and Exchange Commission was created in 1933 in part to protect consumers’ investments in mutual funds.

Mutual funds grew more popular in the 1950s with an escalating interest in the 1960s, where there was an aggressive growth of mutual funds. In the 1970’s, a ‘no load’ fund, which had no sales commission and where the money went straight to the investors, not their managers, grew in popularity as well. The 1980s and 1990s brought with them a bull market mania, as the stock market grew at an even greater pace. Despite the burst of technology bubble and various scandals, mutual funds are still a growing market with more and more nations opening their markets to the world (i.e. China, Vietnam, etc).

Today – What To Look For
While it is important to look at the past performances and histories of mutual funds, this is no guarantee of any future success. An investor must be cognizant of (1) the fund’s sales fees, and expenses, (2) the taxes required when receiving a distribution, (3) the size of the fund, (4) the fund’s volatility, and (5) changes in the fund’s operations.

When investing in a mutual fund, the consumer must also carefully review the fund’s prospectus and shareholder reports. The investor is responsible for (1) scrutinizing the fund’s expenses and fees, knowing how the fund affects one’s tax bill, (3) considering the age and size of fund, (4) considering the turnover rate, (5) understanding appreciating the volatility of the fund, (6) understanding all the risks the fund requires to achieve returns, (7) learning about any changes in the mutual fund’s operations, (8) investigating the kinds of fees charges and services offered, (9) and assessing how the fund will impact the investor’s portfolio’s diversification.