4) Stock Basics: How Stocks Trade

Stock exchanges are places where buyers and sellers meet and decide on price. This could be either physical or virtual. Physical locations involves a trading floor where one sees traders throwing their arms up, yelling, and waving. Virtual exchange involves electronic exchange which is composed of a network of computers.

To reduce the risk of investing, the stock market was created as a medium for the exchange of securities between buyers and sellers. It is like shopping around the neighborhood for a buyer made easy.

The New York Stock Exchange (NYSE)

In 1792, the NYSE, was founded. To date, it is the most prestigious exchange in the world and is the market of choice for the largest companies in America like Coca-Cola, General Electric, Wal-Mart, and Gilette.

In the NYSE, trading is done face-to-face on a trading floor. Firms orders are initially placed through brokerage firms who are members of the exchange and cascaded to the floor brokers who stay on a specific spot on the floor where stock trades. This floor spot is known as the trading post where a specialist or trading person stands to match buyers and sellers using an auction method: The highest amount any buyer is willing to pay is the current price and the lowest price is that which someone is willing to sell. If a trade is made, the information is sent back to the brokerage firm who will then notify the investor who made the order.

The Nasdaq

Another type of exchange is the over-the-counter (OTC) market or the virtual type of which the Nasdaq is the most well known. All trading is done through computers and telecommunications network of dealers. Here, we do not find any floor brokers whatsoever. Before the advent of technology, the largest companies used to be listed only on the NYSE. By the late 90s, Nasdaq has become home to several big companies like Microsoft, Cisco, Dell, Intel, and Oracle. Nasdaq has become a serious competitor to the NYSE.

Other Exchanges

The third largest exchange is the American Stock Exchange (AMEX). Before the Nasdaq, this used to be the alternative to the NYSE. Now, the Nasdaq has since filled that role. In fact, the Amex was bought in 1998 by the parent of Nasdaq, the National Association of Securities Dealers (NASD). Amex now mostly trades in small-cap stocks and derivatives.

In just about every country, stock exchanges can be found. American markets may be the largest but they are still only a fraction of total investments around the globe. Other two main exchanges are the London Stock Exchange and the Hong Kong Stock Exchange (HKSE). Lastly, we come to the over-the-counter bulletin board (OTCBB), which is home to penny stocks because there is little to no regulation making it very risky.

Next Section: What Causes Stock Prices to Change?