In order to understand what the stock exchange is, it is important to first understand what an exchange is. An exchange is an institution that hosts a market where stocks and bonds, options and futures, and commodities are traded. It is where buyers and sellers can come together during specified hours to trade on business days. Rules are enforced by the exchange for you to learn depending on which exchange you choose to use when you begin investing in the stock market. A few exchanges include the American Stock Exchange, the London Stock Exchange, the NASDAQ, and the New York Stock Exchange (NYSE). These are among the most popular exchanges. There are also rules that are enforced by them and include regulations on the brokers and firms that work with them.
The origination of the Stock Exchange can be dated back to the 17th century. It is said that a group of stock brokers started to set up grounds on their own at the corner of Thread Needle Street and Sweetings Alley so that they could begin to buy and sell securities. By the 19th century the two primary functions of the exchange included buying stock, selling stocks and shares and also raising money for new ventures.
A stock exchange also provides facilities for the issue and redemption of securities and also provides for the payment of income and stock dividends. In order to be able to trade a security on an exchange, a company must be listed. Companies that are not listed on an exchange are sold Over the Counter (OTC). These companies are typically smaller and riskier because they do not meet the requirements to be listed on a stock exchange. This is actually the usual way that bonds are traded. In dealing with Over the Counter trading brokers and dealers have to negotiate directly among themselves via the internet or via the phone. (There are no traders waiting to buy or sell unlisted securities). The National Association of Securities Dealers (NASD) monitors the transactions to ensure there is no illegal activity or stock price manipulation. The securities that are traded on an exchange include shares issued by listed companies, bonds, unit trusts, and other investment products. The original offering to investors of stocks and bonds is completed in the primary market, while the trading is completed in the secondary market. The stock exchange is the most important component of the stock market and is determined by supply and demand. Supply and demand is influenced by many factors that in turn affect the stock prices.
Of the stock exchanges, the NYSE is the largest and the oldest in the world. It is because of this and the fact that it is the exchange in which most major U.S. Blue Chip companies trade in, that it tends to control policy in playing the stock market. Blue chip stocks are issues of companies who are well established in their industry and who also have a reputation of producing earnings and paying stock dividends over a long period of time. Small cap stocks (as opposed to blue chip stocks) are.issues of companies that are not as established.
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