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How Does a Stock Exchange Work?

The New York Stock Exchange is one of the most well known in the world.
Stock exchange boards show the prices of various stocks.
Stockbrokers work in the stock exchange on behalf of investors.
The stock exchange in Philadelphia offers trading in index options, equity options, and currency options.
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  • Written By: Jenn Ratliff
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  • Last Modified Date: 30 October 2014
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Those who make a habit of watching news channels have already been introduced to the stock exchange, albeit in an indirect way. The symbols that scroll across the bottom of the channel every few minutes are stock symbols. The numbers that accompany the symbols are the current price of those particular stocks, which is an indication of a company's worth at that particular moment in time. The selling price of stocks varies due to market conditions, inside deals, scandals and even world events, which affect the company's overall viability.

The first practical application of a stock exchange occurred in the early 1600s, when the Dutch West India Company in Amsterdam made it standard practice to trade their stocks. The British followed suit around the time of the Revolution. Philadelphia had its own exchange by 1790, and in the early 1800s, market investors were meeting at the Curb Stone exchange at the corner of Exchange Place and Broad Street in New York City. In 1934, Congress created the Securities and Exchange Commission, allowing more regulation in the trading industries. While this made trading stock safer for smaller investors, it also led to more restrictions and regulations for companies looking to grow through the public sale of stock.

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There are a number of stock exchanges, including the most popular, the New York Stock Exchange (NYSE) and the widely recognized NASDAQ. There is also one for smaller corporations, known as microcap companies. To get a spot on the exchange, a corporation must "go public" and offer their stocks to a wide range of consumers. The company determines the price and number of shares to offer to the public market, called an Initial Public Offering (IPO). In order to have the company listed on the exchange, it must meet stringent financial requirements. In the US, their earnings have to be more than $10 million US Dollars (USD) per year for three years, and they must have issued over one million shares of stocks worth between $70 and $100 million USD. Companies must also register with the SEC and agree to comply with their rules, one of which is to ban those who misuse the exchange or engage in unfair trading practices.

A company listed on a stock exchange has unlimited access to investors. This means unlimited financing opportunities, which can help owners raise capital for their corporation and expand into a more successful business. Depending on the product popularity or market conditions, the price of stocks fluctuates. Investors earn a profit through buying when prices are low and selling when shares have reached their highest prices. Even investors do not directly deal with the exchange, but hire a broker, a specialist who knows the ins and outs of the exchange, to buy and sell for them. Brokers make a commission off of every profitable sale.

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anon146362
Post 4

i don't i agree with the statement at the beginning of the last paragraph. because the regulatory commission places a limit on the number of shares that can be traded by the company.

Fiorite
Post 3

@ PelesTears- Small cap stocks can issue shares on over-the-counter (OTC) markets. These shares can be riskier than stocks, because the companies listing them may not be as financially sound as companies listed on the major markets. The number of companies making it out of the OTC markets is also comparable to the number of college athletes making it to the pros.

The OTC.BB (Bulletin Board) market is the most regulated of the OTC markets. Companies listed on the OTC.BB market must file earnings statements with local regulators and the SEC, making fraud less prevalent on this market.

Investors should thoroughly research any investment made in these OTC markets. Investors should also take into consideration the fact that investments on OTC markets are riskier as well.

PelesTears
Post 2

How does a smaller company go about raising capital by issuing stock? The article stated that a company has to have stated earnings in excess of 10 million dollars to be listed on the stock market. I can't see how there are no equity markets for smaller firms with great products and services.

Babalaas
Post 1

I would like to differentiate between the primary and secondary markets. These are both parts of the stock market, but a primary market is the only part of a market where a company directly benefits from the sale of stock, unless they are issuing additional shares.

When a company first goes public, they list their shares through an underwriter to the public. This IPO is where the company exchanges ownership for cash. IPOs can be very hard for many investors to get n on, and is usually more accessible for institutional investors.

The secondary market is where you or I could log into e*trade or sharebuilder and purchase or sell stock to other individuals looking to buy or sell. In these instances, the company does not receive any money for the sale of their stock.

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