Selling stock to rais e money
In order to raise money to fund its operations, a company has
two main choices. The first choice is debt. This involves going to a bank or
lending institution and borrowing money at a certain percentage and pay it back
over a certain period of time. Another choice is to go into debt by issuing
bonds where the company pays the bondholders back at a certain percentage for a
certain amount of time. The other option is to finance its operations by
selling shares to investors. A share is essentially a part of the company, and
therefore entitles the shareholders to a certain percentage of the company's
profits.
In order to go public, a company has to go through an
investment bank and make an IPO or an initial public offering to the primary
stock market. Afterwards, these shares go to a secondary market such as NYSE or
Nasdaq. This allows the company to sell shares to millions of investors
therefore using their capital to fund its operations.
Primary market
The primary market is where new issues of stock are first
offered. Companies, governments, and other entities obtain money by either debt
or equity securities. The primary markets are facilitated by underwriting
groups which usually consist of investment banks. They will set a beginning
price range for a given security and then oversee the sale directly to
investors. The issuing company receives cash proceeds from the sale which are
used to fund operations and fuel growth. Once the initial sale is complete the
security begins to trade on the secondary market.
Secondary market
The market that is on the news every day is the secondary
market where shares are traded between different investors and institutions.
Before, the secondary market used to be a large trading floor with different
investors yelling out orders to buy and sell. However today, thanks to
computers, all the trades are done almost real time by computerized systems and
the floor now only exists in virtual reality. The main markets that show up on
the news every day are NYSE which the New York Stock Exchange, AMEX and NASDAQ.
One of the largest difference between primary and secondary markets is that in
the primary market, the prices are set beforehand, while in the secondary
market, the prices are only determined by market forces such as supply and
demand.
All those symbols streaming during CNN Financial news are
called ticker symbols, and each corporation's stock has one. It's an
arrangement of characters which are usually letters to represent a security
that's being publicly traded on an exchange. When a company becomes publicly
traded, it gets to pick a ticker symbol for its stock. It's useful to know that
stocks trading on the NYSE usually have three symbols, and Nasdaq stocks have
four letter symbols.
Types of secondary markets
Centralized markets
A centralized market consists of a market structure where all
orders are routed to a central exchange such as a trading floor. The quoted
prices of different securities trading on the market show the only price that's
available for the security available to investors. NYSE is considered to be a
centralized market.
Over the counter markets
An over the counter market or OTC market is a network of
brokers and dealers with no centralized exchange. Usually stocks will trade on
such an exchange because they do not meet the listing requirements of other
exchanges. Even though Nasdaq operates as a network of dealers communicating by
computer systems, it is a very large stock exchange with listing requirements
and is therefore not referred to as an OTC Market.
Exchanges
Exchanges are marketplaces where securities and other
financial instruments are traded. The main function of an exchange is to
coordinate fair and orderly trading as well as to provide information about the
price of those securities to investors in an efficient manner. An exchange can
be considered a platform where investors trade securities with one another and
where economic concepts such as supply and demand are clearly exemplified.
Exchanges do not have to be a public trading floor, but could exist in a
virtual world where all the trading is coordinated by computers. Many famous
exchanges are located around the globe such as NYSE in New York, Tokyo Stock
Exchange in Tokyo, and NASDAQ which is an exchange fully run on computer
systems.
In order to be listed on a specific exchange, a company must
meet certain requirements such as regular financial reports and a certain
amount of market capitalization.
NYSE
The New York Stock Exchange or the «Big Board» is
considered to be the largest exchange of equities in the world judging by the
total market capitalization of the securities that are listed on it. Even
though it used to be a private organization, it became a public entity in 2005.
Its parent company is called NYSE Euronext after it acquired the European
Exchange in 2007.
At first, NYSE relied only on the floor trading system,
having all the trades yelled by investors and then executed. Today however,
more than half of all the transactions that happen on this exchange are
conducted by electronic means, and floor trading is used for only high volume
institutional trading.
The beginnings of the NYSE go back to 1792. Because of its
long history and high reputation, some of the most prominent and well known
companies of the world are listed on it. Foreign corporations can list on it as
well as long as they adhere to specific SEC rules known as listing
standards.
NYSE opens for trading Monday through Friday 9:30 AM to 4:00 PM
Eastern Time. It also shuts down for nine holidays out of the
year.1
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Nasdaq
NASDAQ or National Association of Securities Dealers
Automated Quotation is a computerized exchange that provides the ability to
trade for more than 5000 actively traded over the counter stocks. This exchange
is only a few decades old, dating back to 1971 when it became the world's fist
electronic stock market. While stocks listed on the NYSE are comprised of three
letters generally, the stocks on NASDAQ tend to be listed in four or five
letter symbols. However, if the stock is a transfer from the NYSE, then it
could have a three letter symbol while trading on NASDAQ.2 Usually,
stocks on Nasdaq tend to be high tech and carry a little bit more risk than
those on NYSE. It's home to tech giants such as Microsoft, Intel, and Cisco.
AMEX
AMEX is the third largest exchange in the United States and
has now merged with Nasdaq. It is located in New York City and now handles
roughly 10% of all securities traded in the US3. Before Nasdaq, it
used to be a strong competitor to NYSE, but now it carries a lot of small cap
stocks, and ETFs.
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3 IBID
The Market
What is commonly referred to as the market is where shares
are traded and is more specifically the equity market. It is one of the most
vital areas of the market economy since it provides companies with access to
capital to finance their operations and it lets investors own a piece of the
companies and therefore realize potential gains based on the company's future
performance.
Indexes
An index is best understood as a statistical measure of
change in economy or a securities market. In the case of the financial markets,
an index acts like a portfolio with securities that represent a particular
portion of the market. The index is usually expressed as a change from a base
value in percentages.
Since investors cannot directly invest in a whole index, and
the only way to do that is by individually selecting stocks in the index and
adjusting them accordingly, index mutual funds and index-based ETFs (See Below)
allow investors to buy securities that represent the broad market segments. It
is important to remember that the index does not reflect the individual stocks,
but rather acts as a barometer for market sentiment. Stocks change in price due
to many different factors, and stocks will not necessarily stop going up in a
bear market.
Main Indexes
Dow Jones
The Dow Jones Industrial Average, also known as the DOW, is a
price-weighted selection and average of 30 significant stocks traded on Nasdaq
and NYSE that are thought to represent the market as a whole. Also known as the
DJIA, this is what is used to gauge whether the market has gone up or down and
where it is headed. It is the oldest and most watched index in the world. A
concept that is important to understand is the Dow Theory that states that
prices tend to move with positive correlation to each other. This is a very
detailed theory and is well out of scope of this paper; however, it is worth
summarizing. Under this theory, if the Dow Jones Industrial Average moves in a
certain direction, it's not an indication of a trend. However, if the DJIA and
the Dow Jones Transportation Average move in the same direction, it could
indicate an emerging trend. It is what technicians use to gauge market
sentiment and movement.
Nasdaq 100
The Nasdaq 100 is composed of 100 largest and most actively
traded companies on Nasdaq. While it includes many different industries, it
generally does not include financial institutions since those usually trade on
NYSE.
S&P 500
The Standard and Poor's 500 index is comprised of 500 stocks
chosen for their market size, liquidity and industry grouping as well as
several other factors. It is designed to be an indicator of US equities. It is
one of the most commonly used benchmarks to gauge the US market. Since it
contains so many companies and in so many broad ranges, many people consider it
to be the definition of the market.
Exchange Traded Funds
ETFs or Exchange Traded Funds are securities traded on the
stock exchange with a specific symbol just like any other company. However,
ETFs track an index or a commodity, or several assets like an index fund. By
owning an ETF, an investor can use the diversification of an index fund, as
well as the ability to sell short, or leverage a specific index fund. For
example, one of the best known ETFs is SPDR (Spider) which tracks the S&P
500 and trades under the sym bol SPY.
Market Sentiment
It's in the news all the time. «This bear market
this» or «This bull market that.» These metaphors came from the
different way the animals use to attack their opponents. The bull swipes his
horns up when attacking, while the bear swipes his paws down. They describe
current market sentiment and how investors feel about putting money in the
market in general. The two main descriptions are «Bear Market» and
«Bull Market.»
Bear Market
A bear market is a market condition in which the prices of
the securities on average are falling or are expected to fall. Usually, a
downturn of 15 - 20% in different indexes is considered the beginning of a bear
market. Usually, investors are pessimistic or scared, and are pulling their
money out of the market causing stock prices to fall.
Bull Market
It's the exact opposite of the bear market. Whereas in the
bear market the prices of securities are falling, the prices of securities in a
bull market are on the rise. Also generally defined as a climb of 15-20% in
different indexes is the beginning of a bull market.4 Usually
investors in such a market are optimistic, investor confidence is up, and so
are stock prices.
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