A stock exchange is defined as “an entity that exists to provide a service for stock brokers and traders to trade bonds, stocks and other types of securities”. A stock exchange also offers other services. It offers facilities for the issuance and the redemption of securities as well as other financial instruments. The kinds of securities that are usually traded on a stock exchange are shares that are issued by companies, bonds, pooled investment products, and unit trusts. There are three main stock exchanges in the U.S.: the Nasdaq, the New York Stock Exchange and the American Stock Exchange. The following will take a closer look at what a stock exchange is.
The basic principle is that a stock exchange allows an investor to both buy and sell stocks or shares of a company. The general idea for an investor is to make a profit, which is best accomplished by timing his or her purchase of a stock at a relatively low price, while selling it at a price that is considerably higher. Each time an investor makes a trade (a buy or a sell), he or she will have to pay a certain fee to a broker for negotiating that trade on his or her behalf. An investor can also short sell a stock.
A dividend is basically a payment that a corporation distributes to its shareholders. In another sense, a dividend is the share of corporate profits that is paid to its shareholders. A growth stock is defined as company stock, which produces both sustainable as well as substantial, positive cash flow. In addition, a growth stock generally is company stock from a company that is seen as having income and revenue that will likely increase at a rate superior to comparable companies in the same market sector.
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Public investors are all those private people who use their own money to invest in a company’s stock. Public investors may also not be solely individual investors, but large institutions who buy a company’s stock. An investor is responsible for what stock he or she chooses to invest in, no matter what a so-called financial analyst or broker says to tout a stock in a recommendation. Knowing what stock to invest in is based on an investor doing research himself or herself, which involves checking the company’s price to earnings ratio, looking at its past performance, and also understanding precisely what business it is in.
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Financial engineering is a field that is associated with making new financial instruments and new financial strategies. These instruments and strategies are normally specialized interest rate derivatives and exotic options. Financial engineering helps the stock exchange by applying mathematics and applied financial theory to trading stocks. As a result, financial engineering also has an impact on stock prices.
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Forensic investing is defined as looking beyond the ordinary when it comes to trading stocks. For example, a forensic investor closely analyzes a company’s fiscal soundness by digging deep into a company’s records and looking further beyond a company’s financial statements. A forensic investor basically looks for warning signs that a company is in financial trouble by searching particularly for problematic signs. As such, a forensic investor basically helps a stock exchange by weeding out any problem companies that are trying to hide their financial troubles from the public.
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Insider trading can be highly unscrupulous as well as sometimes illegal. It is defined as the trading of company stock or other security by persons who have access to information about a company that is not available to the public. Sometimes, insider trading is very legal if it is done by corporate officers in a way that does not capitalize on information that is not public. However, in many cases, insider trading is stock trading where an insider has non-public information that allows him or her to financially benefit when the public cannot, which is a breach of confidence. If caught, a person who inside-trades can face prison time.
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Without shareholders, a stock exchange would not be able to exist. A shareholder can be just one private person or a large institution or corporation that owns stock in a company that is either private or public. The importance of shareholders to a stock exchange is that they provide capital to companies and promote the trading of stocks. However, to be technical, the term “shareholders” can extend beyond just the actual entities who have bought stock in a company. Customers and suppliers, to name just two examples, can also be considered shareholders of a company since they have a direct and indirect interest in any given corporation.