Stock Markets

The actors in the stock market include individual retail investors, mutual funds, banks, insurance companies, hedge funds, and corporations. The world's largest stock exchange market is the New York Stock Exchange (NYSE), and the NASDAQ is an American dealer-based stock market in which dealers sell electronically to investors or firms. By the end of this section, you will be able to differentiate among these stock markets and explain the purpose and function of a market index.

NYSE

The New York Stock Exchange is the world's largest stock exchange by market capitalization at $14.242 trillion as of December 2011.


LEARNING OBJECTIVE

  • Distinguish the New York Stock Exchange from other stock exchanges

KEY POINTS

    • The origin of the NYSE can be traced to May 17, 1792, when the Buttonwood Agreement was signed by 24 stockbrokers outside of 68 Wall Street in New York under a buttonwood tree on Wall Street.
    • The New York Stock Exchange (sometimes referred to as "the Big Board") provides a means for buyers and sellers to trade shares of stock in companies registered for public trading.
    • The New York Stock Exchange is open for trading Monday through Friday from 9:30 am to 4:00 pm ET, with the exception of holidays declared by the NYSE in advance.
    • Traders can gather around the appropriate post. There, a specialist broker acts as an auctioneer in an open outcry auction market environment to bring buyers and sellers together and to manage the actual auction.
    • To be listed on the New York Stock Exchange, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years.

TERMS

  • Dutch auction

    an event to buy or sell that starts at a high price that is gradually reduced by the auctioneer until someone is willing to buy

  • NASDAQ

    The National Association of Securities Dealers Automated Quotations; this is an electronic stock market.

  • secondary market

    The financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold.

New York Stock Exchange

The New York Stock Exchange, commonly referred to as the NYSE, is a stock exchange, or a secondary market. With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries.

After the initial issuance, investors can purchase from other investors in secondary markets like the NYSE. If an investor wished to buy a stock from Apple, for example, the actual company is not directly involved. Secondary markets can be further subdivided into auction or dealer markets, typified by the mode of transactions. The NYSE is an auction market. Buyers and sellers meet at a physical location (in this case, Wall Street) and announce their bid or ask prices.

At the NYSE, traders gather around a specialist broker, who acts as an auctioneer in an open outcry auction market environment to bring buyers and sellers together and to manage the actual auction. The auction market format aims to bring together the parties with mutually agreeing prices in an efficient manner. The auction process moved toward automation in 1995 through the use of wireless hand held computers (HHC). The system enabled traders to receive and execute orders electronically via wireless transmission .

Buyers and sellers meet and engage in face-to-face transactions at the NYSE, which is an auction-style secondary market.

The NYSE is by far the world's largest stock exchange by market capitalization of its listed companies at $14.242 trillion as of December 2011, and most of the largest US companies are listed on the NYSE. The NYSE's biggest competitor is NASDAQ; both are major secondary markets vying for large and profitable companies to list on their exchange.

Secondary markets like the NYSE serve a vital function as a setting where companies can raise capital for expansion through selling shares to the investing public. They also gain advertising and a boost in prestige, which likely increases their stock value. To be able to trade a security on the NYSE, it must be listed. To be listed on the New York Stock Exchange, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years. They must also disclose certain information to the exchange, providing a measure of transparency that prevents insider manipulation of the stock prices.