To the average person the stock market is a mystery. Some days the market is up, some days it is down, but why the market fluctuates and what it means to you could get lost in a sea of jargon and terminology.
So, how are stocks bought and sold? There are many in-between steps that happen when placing stocks and bonds with institutional investors and the investing public.
An investor can acquire stocks and bonds in the private or public markets. For purposes of this article, we will focus on the public markets, although the procedures are the same for the private market.
The US has three major stock exchanges: The Dow Jones Industrial Average, The S&P 500, and the NASDAQ. There are many other stock exchanges in the US as well as around the world, and foreign business may be listed on one or more exchanges.
Requirements For Being Listed On And Exchange
In order for a company to be listed on an exchange, they must meet certain requirements such as sales reports, net worth requirements, and capital requirements. These financial statements necessitate an examination by financial and legal experts to ensure accuracy, and establish trust in the investing community.
This process encourages banks as well as the general public to invest in the bonds or stocks of a company. As the company grows more successful, it may move from the private to public markets which are considerably larger.
Functional Trading Of Stocks And Bonds
The stocks that are listed on a major exchange have gained membership through the meeting of regulatory requirements, followed by an initial public offering, or IPO.
While regulatory issues vary for corporate and municipal bonds, bonds are bought and sold in the over-the-counter market in much the same way as stocks. Although bonds are normally not quoted on an exchange, they do trade in large markets which are regulated and policed by members and officers.
Off-line and online brokers enter their orders in the same way. Market orders are directed through the electronic bid-ask profiles of every security, and buyers and sellers are connected either by a stockbroker, or electronically.
Sometimes, a large order that is massive enough to disturb the market is placed, and require the assistance of specialists. These specialists, or market makers, trade securities between the bid-ask price, and may be called in to contact major institutions that may be interested in amassing sizable positions.
Stocks And Public Opinion
It is often a broker or brokerage firm that is responsible for shaping opinion on specific sectors and stocks. A professional broker’s job is to be on the look-out for news and trends that are shaping the market in order to find opportunities for their clients’ portfolio.
Today’s brokers are charged with studying the fiscal health of a company, including earnings projections, credit movements, as well as interest rate projections to arrive at conclusions about business conditions.
Many brokers are responsible for directing clients to their brokerage-run mutual funds, and can sometimes be more sales person than investment adviser. That is why it is up to you to do your own research and make the final decision for yourself.