Many of us have heard that the stock market is the best way to make money and invest for the long term, but few of us have taken the time to find out exactly what makes a stock market and what makes a stock exchange work.
Stock exchanges exist to promote investment in the securities of public corporations, and these exchanges help those companies raise the capital they need for ongoing business and business expansion.
In addition, of course, stock exchanges provide individual and institutional investors alike with a place to invest their money and participate in the growth of the companies listed on the exchange.
Some members of a stock exchange will be experts in a particular type of security, while other members will be acting as agents for other stock brokers. The purpose of the stock market is to provide a platform for the exchange of the various securities between sellers and buyers.
The stocks that appear on the stock exchange are known as listed stocks, and each stock exchange has its own unique standards for companies that are listed on the exchange.
Even after a particular company is listed, it must continue to meet certain specifications to retain its listing. For instance, if the stock of the company trades below $1 a share for a specified period, it can be dropped from the NASDAQ exchange and relegated to the much less prestigious Over the Counter (OTC) market.
In the world of stock market investing in the United States, the three biggest players are the NYSE, the NASDAQ, and the AMEX (known as NYSE Amex Equities today). The New York Stock Exchange (NYSE) is one of the oldest and most prestigious in all the world, and it lists some of the best-known companies in the country.
The NASDAQ market is perhaps best known for the many technology stocks, biotechnology firms, and other fast growing companies on its boards. Like the NYSE, the NASDAQ is home to many companies that are household names, and in recent years, the NASDAQ has been one of the most frequently followed benchmarks.
The third stock exchange, the NYSE Amex Equities, is now owned by the parent company of the NASDAQ, and the NYSE Amex Equities is home to many small cap stocks, derivatives, and other unique financial instruments. In addition, the NYSE Amex Equities is home to more than 500 exchange traded funds, or ETFs, which allow individual investors to invest in a number of market segments and indexes through the purchase of a single stock.
In addition to these American stock exchanges, there are stock exchanges operated in virtually every country around the world. Each stock exchange has its own unique rules and conditions, so it is important for every investor to understand the rules of the road before investing.
Before you start investing in the stock market, check out our infographic about the 10 commandments of investing in the stock market.