An Introduction to the US Stock Market

When buyers and sellers meet to exchange shares of a company

, then they do it at the stock exchange. Stock exchanges are virtual or physical market places which offer standardized procedures for stock trading. This is of benefit for both parties, buyers and sellers, because only an efficient and liquid stock market is a secure place to trade shares.

Stock markets play an important role in today's economy. For a company it's the best place to raise much money quickly. Companies sell shares to have more money for investments. They can achieve their business goals faster. Private investors can buy shares to become a partial owner of the company with voting rights at the shareholder meeting and the right of shared profits. For an investor it's the only way to become part of a business and enjoy the chances for high profits without founding an own company. Stocks also limit the risks and liability. In the worst case, you loose the purchase price when the shares go worthless.

There are various different stock exchanges. The most important ones in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. The NYSE is a physical market place while the NASDAQ is a virtual exchange. The NYSE, also known as the "Wall Street", executes the orders to buy or sell shares through so called specialists in an "open outcry" system. Each specialist is responsible for a specific company. When an order to buy or sell stocks comes in then the specialist tries to match orders to receive an execution. Since all orders for the same stock come to the same specialist, he usually has enough shares to match the orders.

The NASDAQ works different because there is no specialist. There are several market makers per stock who are obligated to provide a current bid and ask price at all times. There are also electronic communication networks (ECN) which work 100% electronically. All orders are matched that way. Since there is no physical location of the NASDAQ like the NYSE trading floor, it's a virtual stock exchange.

Today's stock markets work very efficiently and fast. Advances in technology, especially the Internet, allowed the stock exchanges to grow rapidly the last years. Today everybody with a computer and Internet can trade stocks online with low transaction costs. Years ago stock trading was expensive and made sense only when you bought a large amount of shares. Now you can trade stocks in seconds and so inexpensively that so called day traders execute hundreds of trades per day from their home computer.

You still need a broker to get connected to the stock market. A broker is the intermediate between the investor and the stock exchange. He takes care that your orders are executed properly and timely. Discount brokers offer only order execution while full service brokers offer more services at a higher fee like research, advice and financial planning.

No matter which broker you choose, the stock market is an exciting place offering you the choice between thousands of companies. There are new opportunities every day.

An Introduction to the US Stock Market

By: Jeanie Smith

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