certainly have heard of the stock market. The paper and TV report
its progress - “The Dow (Dow Jones Industrial Average (DJIA)
was down 235 points today...” The Dow is a market index
showing how a small number of companies trading on the stock market are performing
for a particular day. The S&P 500 is also a stock index.
However it represents 500 of the biggest company's traded on the stock
market. Have you ever
wondered about what makes the stock market so important to our economy? Just how popular
is the stock market? Well, consider that one out of three adults
own stock. That means probably someone you know owns stocks.
he stock market is just what you think it might be; it is a market where people can go and purchase stock or sell their existing stock. The stock market is made up of several stock exchanges. A stock exchange is a place where buyers and sellers hold daily auctions (the biding of stocks determine the price) for thousands of different stocks. Stock exchanges determine the share price of a stock, the stock is then traded for money, and finally the shares are issued. There are seven exchanges in the U.S., more than 140 worldwide. The most common exchange is the one in New York, but the ones in Chicago, Philadelphia and others also handle stocks as well. They deal with specific areas of business like live stock, commodities, and precious metals.
tocks are traded in two kinds of markets: primary and secondary. When a company decides to issue new stock to the public, it does it through a primary market. These markets are handled by an investment banker like Merrill Lynch, Morgan Stanley, or Salomon Brothers. These bankers underwrite (guarantees) the successful sell of the stock and also agree to purchase any that are not sold.
f the issue (number of stocks offered for sale) is quite large, several investment bankers may form a syndicate and divide the offering between themselves. In this first sale of the stock, the money (a set price per share) used to purchase the stock goes directly to the company. Any further sale of their stock happens in the secondary market.
hen stocks are traded in the secondary market, none of the money goes to the company that originally issued it. It goes to the seller, minus a commission for the broker. A broker's commission is based on the fact that they help with the sell by giving advice and handling all the financial paperwork involved with the sell. When a market crashes, the fall occurs in the values of stocks traded in the secondary market. In other words, it is a shareholder who takes the loss not the company. The value of company assets are unchanged by the fluctuation of stock prices.
n the secondary market a stock value may react to many factors that are completely unconnected to the company that issued the stock. The company itself may be perfectly healthy even as its stock decreases in worth. The price of a stock is determined by supply and demand. If a company is doing well, lots of people will want that company stock, and the bid price will rise. If a company is doing poorly, a person either doesn't want to buy that company stock or they want to sell their existing shares, and the bid price will drop.
f everyone who bought stock simply kept it and waited to collect dividends, there would be no secondary market. The main reason for buying stock, however, is the speculation or hope that the value of the stock will increase so it can be sold at a profit.
secondary market is by far the larger of the two markets. It comes into existence because a share of stock, once it has been sold by a corporation, takes on a life of its own. It becomes a piece of property in itself. Like a painting or a rare baseball card, a share of stock is regarded as something with a potential for increased value. Owners of stocks are continually in the business of trying to better their fortunes by selling and buying stock in the secondary market.
he institutions that handle secondary trading are the stock exchanges and the over-the-counter (OTC) market. The greatest volume of trading is done by the exchanges. In the United States, the New York Stock Exchange (NYSE) has more trading volume than all the other American exchanges put together. The value of the NYSE listed stocks is also the greatest. In 1995, NYSE stocks were worth $4.1 trillion -- about half of the total value of all U.S. stocks and one quarter of the value of all stocks worldwide.
type of stock, called over-the-counter (OTC) stock, is not traded
on any exchange. Instead, it is found on a computerized system
called the National Association of Securities Dealers Automated Quotations,
or NASDAQ, In 1995, OTC stocks were worth about $3.3
trillion. They usually -- but not always -- come from smaller,
- How many exchanges are located in the U.S.? worldwide? Which is the largest in the U.S.?
- Describe the purpose of the primary market.
- What are the main parts or features of the secondary markets?
- What might happen if the world did away with secondary markets and only had primary markets?
- Explain how a share of stock takes on a life of its own?
- What stops a company from issuing billions even trillions of shares of its company stock?