Stock Exchange is an organization which provides platform to buyers and sellers of shares to trade with each other. All the listed stocks are traded over the stock exchanges like New York Stock Exchange (NYSE) or American Stock Exchange (AMEX). All the trades on a stock exchange are dealt through a dealer but it is necessary to know the link between the stocks of a company and the stock exchange on which it is listed and the safeties a stock exchange provides to its investors.
Functions of a Stock Exchange
The basic job of the stock exchange is to readily conversion of stocks into cash or vice versa, which means to buy and sell stocks of various listed companies.
The stocks are issued to general public through IPO (Initial Public Offering) and than are listed on one or more stock exchanges for trading. The company issues shares to its first shareholders through IPO (often considered primary market).
All the buy or sell orders are recorded at stock exchange and price of the stock is determined through demand and supply mechanism. One can get all the information about stocks when dealing with an authorized dealer (often known as broker). The ask price of $ 15 means some one intends to sell stocks of company A at $ 15. On the other hand bid price of $ 14.50 means some one intends to buy some stocks of company A at $ 14.50. The variance in ask and bid price is known as bid-ask spread. Where ask and bid prices match the trade is struck.
Auction Exchanges
The auction exchanges are those where buyers and sellers verbally negotiate bid and ask price in physical presence. The dealers are experts of their fields and interact with each other to buy or sell the stocks. The AMEX and NYSE are basically auction exchanges. Conversely the electronic exchanges are threat to auction exchanges as they are much faster and reliable then the auction exchanges.
New York Stock Exchange (NYSE)
The NYSE is considered one of the best stock exchanges around the globe. The entire market capitalization of NYSE in 31-Dec-2007 was estimated around $ 30.50 trillion.
The companies intending to be listed on NYSE needs to fulfill the listing requirements of NYSE. Listing on NYSE is considered as a matter of prestige for a company. For an instance to be eligible on NYSE the market capitalization of a company must be more than $ 50 million and the company is supposed to maintain its price above $ 1.
The NYSE provides some basic protections to investors trading through it. Some of the major protections available to such investors are given here.
- The approval from shareholders is must for any equity incentive plan (like stock option or preferred stock etc)
- The number of independent directors of the board must form majority.
American Stock Exchange (AMEX)
As compared to NYSE, the AMEX is a smaller exchange but a prominent one. It has two historical credits of modern products. The one is introduction of exchange traded funds (ETFs) and the other is being second largest options trading market.
The NASDAQ
National Association of Securities Dealers Automated Quotations (NASDAQ) is an electronic exchange. The bid and offers are entered through computers connected through a communication network with main server of the exchange. The bids and offers are matched and trades are struck electronically. The bids and offers are projected on computer screens or large screens for awareness of the investors. The market capitalization of NASDAQ is less than that of NYSE but the volumes and the number of listed companies at NASDAQ is much more than the NYSE.
The listing requirements of NASDAQ allow companies with small capitalizations. This facility allows small investors to invest and as well as small companies get listing.
Alternative Trading Systems (ATS)
The alternative trading system provides platform to buyers and sellers of stocks without the involvement of exchange. The ATS run normally through electronic communication system (ECNs). INET is and example of ECNs. The ECNs are not intended for small investors but for institutional investors.
The OTC (Over the Couther)
The OTC is comparatively smaller market for small companies and small investors. The companies de-listed from NASDAQ are slipped to OTC for trading. The stocks trading on OTC are generally considered riskier stocks. OTCBB (Over the Counter Bulletin Board) is an OTC market and the companies de-listed from NASDAQ are placed here. Pink Sheets is another OTC market where trading volumes remain low.
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