KNOW MORE ON STOCK EXCHANGE

STOCK EXCHANGE
Stock Exchange, organized market for buying and selling financial instruments known as securities, which include stocks, bonds, options, and futures. Most stock exchanges have specific locations where the trades are completed. For the stock of a company to be traded at these exchanges, it must be listed, and to be listed, the company must satisfy certain requirements. But not all stocks are bought and sold at a specific site. Such stocks are referred to as unlisted. Many of these stocks are traded over the counter—that is, by telephone or by computer.
Stock exchange transactions involve the activities of brokers and dealers. These individuals facilitate the buying and selling of financial assets. Brokers execute trades on behalf of clients and receive commissions and fees in exchange for matching buyers and sellers. Dealers, on the other hand, buy and sell from their own portfolios (inventories of securities). Dealers earn income by selling a financial instrument at a price that is greater than the price the dealer paid for the instrument. Some exchange participants perform both roles. These dealer-brokers sometimes act purely as a client’s agent and at other times buy and sell from their own inventory of financial assets.
II. THE IMPORTANCE OF STOCK EXCHANGES
Stock exchanges perform important roles in national economies. Most importantly, they encourage investment by providing places for buyers and sellers to trade securities. This investment, in turn, enables corporations to obtain funds to expand their businesses.
Corporations issue new securities in what is known as the primary market, usually with the help of investment bankers. The investment bank acquires the initial issue of the new securities from the corporation at a negotiated price and then makes the securities available for its clients and other investors in an initial public offering (IPO). In this primary market, corporations receive the proceeds of security sales. After this initial offering the securities are bought and sold in the secondary market. The corporation is not usually involved in the trading of its stock in the secondary market. Stock exchanges essentially function as secondary markets. By providing investors the opportunity to trade financial instruments, the stock exchanges support the performance of the primary markets. This arrangement makes it easier for corporations to raise the funds that they need to build and expand their businesses.
Although corporations do not directly benefit from secondary market transactions, the managers of a corporation closely monitor the price of the corporation’s stock in secondary markets. One reason for this concern involves the cost of raising new funds for further business expansion. The price of a company’s stock in the secondary market influences the amount of funds that can be raised by issuing additional stock in the primary market.
Corporate managers also pay attention to the price of the company’s stock in secondary markets because it affects the financial wealth of the corporation’s owners—the stockholders. If the price of the stock rises, then the stockholders become wealthier. This is likely to make them happy with the company’s management. Typically, managers own only small amounts of a corporation’s outstanding shares. If the price of the stock declines, the shareholders become less wealthy and are likely to be unhappy with management. If enough shareholders become unhappy, they may move to replace the corporation’s managers. Most corporate managers also receive options to buy company stock at a selected price, so they are motivated to increase the value of the stock in the secondary market.
Stock exchanges encourage investment by providing this secondary market. Stock exchanges also encourage investment in other ways. They protect investors by upholding rules and regulations that ensure buyers will be treated fairly and receive exactly what they pay for. Exchanges also support state-of-the-art technology and the business of brokering. This support helps traders buy and sell securities quickly and efficiently. Of course, being able to sell a security in the secondary market increases the relative safety of investing because investors can unload a stock that may be on the decline or that faces an uncertain future.
Stocks are shares of ownership in companies. People who buy a company’s stock may receive dividends (a portion of any profits). Stockholders are entitled to any capital gains that arise through their trading activity—that is, to any gain obtained when the price at which the stock is sold is greater than the purchase price. But stockholders also face risks. One risk is that the firm may experience losses and not be able to continue the payment of dividends. Another risk involves capital losses when the stockholder sells shares at a price below the purchase price
In an example of a trade, an investor wanting to buy 200 shares—also known as two round lots, of 100 shares each—of ZINOX stock will telephone or e-mail the order to a brokerage firm. This communication is normally made to an individual called a stockbroker. The investor might desire to buy the shares at the market, or current, price. On the other hand, the investor may choose to pay no more than a set amount per share. The brokerage firm then contacts one of its floor brokers at the NYSE, the exchange on which ZINOX stock is traded. The floor broker then goes to ZINOX’s stock post—that is, the particular spot on the trading floor where ZINOX stock is traded. Here other floor brokers will be buying and selling the same stock. The activity around the post constitutes an auction market with transactions typically communicated through hand signals. The most important person at the post is a broker-dealer called a specialist. The job of the specialist is to manage the auction process. The specialist will actually execute the trade and inform the floor broker of the final price at which the trade has been executed. For this service, the investor will pay the original broker a commission, either as a flat fee or as a percentage of the purchase price.
The price of a stock depends on the market forces of supply and demand. With companies issuing only a limited number of shares, price is determined by demand. An increase in demand will raise the price whereas a decrease in demand will lower the price. Normally the demand for a particular stock depends on expectations regarding the profits of the corporation that issued the stock. The more optimistic these expectations are, the greater the demand will be and, therefore, the greater the price of the stock.
IV. STOCKBROKERS
A stockbroker is an employee of a brokerage firm. The individual investor contacts his or her stockbroker and provides the stockbroker with the details of the transaction the investor wants to complete. Stockbrokers, however, are more than order takers or sales representatives for their firms; they frequently provide advice to the investor. They may have their own client list and call clients when they. Stockbrokers almost always have certification from, or registration with, a state government agency or an exchange or both. For this reason they are sometimes referred to as registered representatives.
A. Institutional Brokers
Institutional brokers specialize in bulk purchases of securities, including bonds, for institutional investors. Institutional investors include large investors such as banks, pension funds, and mutual funds.
Institutional brokers generally charge their clients a lower fee per unit than brokers who trade for individual investors. This is the case because the total cost of both large and small transactions is much the same. When this total cost is spread over a larger number of shares, then the cost per share is lower. Given the lower per-share cost, institutional brokers can charge a lower per-share fee.
V. TRADING IN OTHER SECURITIES
Exchanges trade in all forms of securities. Although the general operations of exchanges apply to all securities trading, there are some differences. In particular, trades in nonstock securities, such as bonds and options, are often managed by financial intermediaries other than brokers.
A. Bonds
Bonds provide a way for companies to borrow money. Companies obtain funds when they initially issue bonds. As with the initial issue of stocks, companies use the services of investment banks in primary market transactions for bonds. Once issued the bonds are then traded in secondary markets or on exchanges and the company is no longer directly involved.
B. Options
Options are traded on many U.S. stock exchanges, as well as over the counter. Options writers offer investors the rights to buy or sell, at fixed prices and over fixed time periods, specified numbers of shares or amounts of financial or real assets. Writers give call options to people who want options to buy. A call option is the right to buy shares or amounts at a fixed price, within a fixed time span. Conversely, writers give put options to people who want options to sell. A put option is the right to sell shares or amounts at a fixed price, within a fixed time span. Buyers may or may not opt to buy, or sellers to sell, and they may profit or lose on their transactions, depending on how the market moves. In any case, options traders must pay premiums to writers for making contracts. Traders must also pay commissions to brokers for buying and selling stocks on exchanges. Options trading is also handled by options clearing corporations, or clearinghouses, which are owned by exchanges.
C. Futures
Futures contracts are also traded on certain U.S. exchanges, most of which deal in commodities such as foods or textiles. Futures trading works somewhat like options trading, but buyers and sellers instead agree to sales or purchases at fixed prices on fixed dates. After a futures contract is made, the choice to buy or sell is not optional. Instead, there is an obligation to buy or sell. Futures contracts are then traded on the exchanges. Commodities brokers handle this trading.
Futures and options traders often judge market trends by monitoring compiled indexes and averages of stocks, usually organized by industry or market ranking. Among the most closely watched U.S. indexes are the Dow Jones averages and Standard & Poor’s.