Buying Shares – Chapter 6: Stock Exchanges, Why are companies listing on a stock exchange today?

This is chapter number 6 out of 19. Read the rest:

Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1: Introduction
Read Buying Shares – Chapter 2: What are Stocks and Shares?
Read Buying Shares – Chapter 3: Different Classes of Stocks
Read Buying Shares – Chapter 4: What affects ‘Stock Prices’?
Read Buying Shares – Chapter 5: Stock Markets

There are two reasons companies list on a stock exchange:

1. To allow the present private shareholders to trade some of their venture to make instant money. Microsoft for instance spent an incredible $240 million dollars on just 1.6% of stock in Facebook netting the founder a lot of money for a site which, whilst very useful, is still, at the time of writing, making losses.

2. To lift up capital to enlarge the company.

In this particular case, instead of selling their personal shares, the owners will float new ones to the public. They will then own a smaller amount of the company, but the company altogether should be worth more due to the new insertion of money that can then be used on expanding the company or in the purchase of new assets or to cover debt or loans.

Companies are not limited to raise money on the stock market only once, they can come back to investors again and again to raise even more funds. Of course it’s not ideal to give away the biggest chunk of a company but needs must.

The largest equities based exchange in the world is considered to be the New York Stock Exchange (NYSE). The biggest and most well-known companies from around the globe are traded on the NYSE eg. McDonalds and Coca-Cola. It was established over 200 years ago in 1792.

The figure below shows the share price for Coca-Cola. Every company stock has a ticker symbol in this case KO represents Coca-Cola.

In NYSE, the traders stand on the trading floor or the pit as it is also known, trades are conducted face-to-face. Information comes in through brokerage firms that are associates of the exchange and streams down to floor brokers who go to a particular spot on the floor where the shares trade. At this point, there is a person known as the “specialist” whose work is to find buyers for sellers and vice versa.

Prices are settled using a public sale method: the present price is the highest price any buyer is ready to pay and the lowest value at which someone is ready to sell. Once a deal has been made, the particulars are sent back to the brokerage firm, who then informs the investor who placed the initial order.

The NASDAQ

The second type of exchange is called an over-the-counter (OTC) market, of which the NASDAQ or the National Association of Securities Dealers Automated Quotations is the most admired. This American based stock exchange has no central place or trading floor- it is electronically run, meaning less room for human error. Once the major players were only listed on the NYSE now NASDAQ offers it a formidable challenge as a result of the technical boom in the ‘90s. It’s now home to shares trading of major blue chip companies like Microsoft, Dell, and Intel.

The NASDAQ was created in 1971 and is the second largest Stock Exchange in theUSafter the NYSE.

The American Stock Exchange (AMEX) was the third largest exchange in theU.S. The AMEX used to be a substitute to the NYSE, but has now been bought by them in January 2009.

There are a lot of stock exchanges located in almost every country around the world. American markets are certainly the largest, but you can find busy stock exchanges across the world. The two other major financial centers areLondon, andHong Kong.

The last stock exchange worth knowing about is the “Over-the-counter bulletin board” (OTCBB). The term “Over the Counter” usually refers to small public companies that don’t meet the listing necessities of any of the regulated markets, including the NASDAQ. Penny Stocks are usually traded on the OTCBB. These are stocks of a very low value or from very small companies. There is very little regulation when trading on the OTCBB which makes trading stock here much riskier. 

Read Buying Shares – Chapter 7: Stock Indexes – What do they stand for?
Read Buying Shares – Chapter 8: How do I Trade Shares?
Read Buying Shares – Chapter 9: What kind of a Trader are you?
Read Buying Shares – Chapter 10: Investing Methodology: Planning Trades and Picking Stocks
Read Buying Shares – Chapter 11: Placing an order – The technicalities involved, Step 1 – Open a Share Dealing
Read Buying Shares – Chapter 12: Step 2 – Research the Stocks
Read Buying Shares – Chapter 13: How to Read Quotes of Shares
Read Buying Shares – Chapter 14: Buying and selling shares- how’s it done?
Read Buying Shares – Chapter 15: Buying Shares – The Rules
Read Buying Shares – Chapter 16: Tips for Stock Market Investing
Read Buying Shares – Chapter 17: The Difference between Stocks and Shares
Read Buying Shares – Chapter 18: Q & A session
Read Buying Shares – Chapter 19: Glossary words to learn