In this chapter, we’ll provide you
with an overview of the stock market and a discussion about how stocks are
organized on the exchanges.
Generally
speaking, the stock market is an organized venue where buyers and sellers meet
to buy and sell stock. You might think of it as being similar to a farmer’s
market. While a farmer’s market is made up of various stands or booths where
goods are bought and sold, the stock market is made up of different exchanges
where people meet to exchange stock for money.
Historically,
if someone wanted to trade shares in a company, they would physically take the
paper certificate of shares to an exchange to buy or sell them. But you can
imagine that as more people became involved in trading, it grew increasingly
obvious that not every buyer and seller could fit into one location and find
someone else interested in buying their stock.
This
is how brokerage houses got their start. Brokerage houses keep a place on the
exchange and trade the stocks on behalf of their many clients.
BROKERAGE
FIRMS
In
fact, if you want to trade stocks on an exchange today, you must trade through
a broker. A broker is an individual or business who trades securities for
another individual or entity. Therefore, any individual or business that acts
as an agent in securities transactions should be registered as a broker.
Brokers
should also be registered with the SEC. Brokers registered with the SEC must
comply with certain requirements, including submitting to Commission and SRO
(Self Regulatory Organizations) examinations, fingerprinting, participating in the lost and stolen
securities program, maintaining and reporting certain information, and
following certain guidelines when using electronic media.
Types
of Brokers
There
are three main types of brokers:
• Full service broker—This broker
offers investment advice and gives you data needed to make investment
decisions. Full service brokers offer a variety of prod- ucts, which may
include stock, bonds, annuities, and insurance, as well as invest- ment advice
and research. Fees vary among full service brokers and the actual broker
handling the transaction is paid mainly by commissions.
• Discount broker—This broker allows you to
make all the trading decisions. A discount broker usually has fewer products
than a full service broker and does not offer investment advice or research.
Generally, they charge lower fees than a full service broker and the actual
broker handling the transaction is usually paid a salary. They make their money
based on volume.
• Online broker—This broker allows you to
make your own trades and manage your own account online (many discount brokers
also offer online brokerage services).
The
first two above are traditional brokers.
With
a traditional broker, you open a brokerage account, deposit money into it, and
then have your broker buy and sell your shares as you direct. This usually
takes place with you calling and placing an order directly with your broker,
who then calls you back to let you know your order has been filled.
A
full-service broker acts as a representative for you, researching stocks, and
advising you on which ones you should buy, sell, or hold in your
portfolio. Because you rely on this
broker to do the work for you, commissions can be high and the fees vary
between brokers or brokerage firms.
On
the other hand, with an online brokerage firm, you actually act as the broker.
You open an online brokerage account, deposit money into it, do the research on
stocks, determine which stocks you want to buy or sell, and place your own
orders online.
Because
you do all this work yourself, the fees are much less, with many companies
offering online trades for under $10 each. Such low-cost fees have opened the
door for many more investors to participate in stock investing and have given
many individuals the ability to finally take full control over their investment
activities.
If
you do decide to work with a financial planner or stock broker assisting you,
call on several of them and interview your prospects. Ask about their
credentials, investment strategies, the range of services provided, and any
fees charged.
STOCK SYMBOLS
Stock
symbols, also called ticker symbols, are letters used to identify a stock or a
mutual fund. Many are acronyms of the company’s name. For example, the General
Electric Company is listed on the NYSE under the ticker symbol GE. In another
example, the ticker symbol for the Ford Motor Company is simply the letter F on
the NYSE.
Stock
symbols for every publicly traded company are available to all investors. Each
exchange lists the companies on the exchange and their stock symbol on their
website. Additionally, the stock symbol will be included in the company’s
prospectus in the stock section.
THE
EXCHANGES
There
are several stock exchanges where stocks, bonds, and mutual funds can all be
bought, sold, and traded in the United States and worldwide markets. We’ll
briefly introduce you to the four major stock exchanges next, including the
NYSE, the NASDAQ, the AMEX, and the Over-The-Counter Bulletin Board (OTCBB).
NYSE
On
the NYSE, stocks are bought and sold for thousands of the nation’s largest
companies through “live outcry.” Stock traders crowd the trading floor and
literally hustle all day long buying or selling shares of common stock. These
traders (also commonly referred to as market-makers) are the people you see
during stock news broadcasts running around the trading floor waving bits of
paper and shouting out prices.
The
orders they place are executed and then displayed in a continuous flow of
symbols and figures up on the Big Board, a huge electronic tally streaming
constantly, hanging up on the south wall of the building.
When
trading stops for the day, tons of palm slips signifying the transaction of
billions of dollars and the hopes of millions of investors are literally swept
up from the trading floor.
You
can learn more about the NYSE by visiting www.nyse.com.
NASDAQ
The
NASDAQ is a completely computerized stock exchange. Listing more than 3,000
companies, it is the largest U.S. electronic stock market. Listed companies
include leaders across all areas of business, including technology, retail,
communications, financial services, transportation, media, and biotechnology.
To learn more, visit www.nasdaq.com.
The
AMEX
This
electronic exchange offers trading in a wide variety of equities, options, and
ETFs. It is one of the largest options exchanges in the U.S., trading options
on broad-based and sector indexes as well as domestic and foreign stocks. To
learn more, visit www.amex.com.
OTCBB
The
OTCBB is a regulated quotation service that lists over-the-counter (OTC) equity
securities. Generally, an OTC equity security is any equity that is not listed
or traded on a national securities exchange. To learn more, visit
www.otcbb.com.
