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.
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