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A Walk on Wall Street
"Today on Wall Street, the market..." announces the financial reporter.
Like most other people, the reporter is using the term "Wall Street," an
actual street name in New York city, to refer to the market for stocks.
Look at the diagram on Mrs. Payton's computer to see how the stock markets
are organized. The two boxes at the top of the diagram show there are
actually two different markets for stocks. The first is the new-issues
market or the primary market. In this market, new or growing
businesses sell stocks to raise money. These stocks are called new
issues because they are brand-new stocks that a company is selling for the
first time. When a new or expanding company decides to offer new
shares of stock to raise capital, the company normally will solicit the
services of investment bankers, who, after determining that the stock is
worthwhile, will buy a large block of stock and offer it for sale to the
public. The new-issues market is very important. It allows
corporations to raise money to get started or to grow. These
businesses can then create jobs and provide us with more goods and services.
This economic growth is good for our economy. Buyers of new shares of
stock can later sell them in the stock market, also known as the secondary
market. In the stock market, people and groups use brokers to trade
stocks they already own, just as automobiles can be traded in the used-car
market. This reduces the costs of trade-the time and money buyers and
sellers would need to spend to find one another to arrange trades.
When stockholders trade stocks in the stock market, the companies that first
issued those stocks don't receive any additional money. But the stock
market is very important to these companies because it allows people to sell
their stocks quickly and easily. If stockholders could not sell their
stocks whenever they wanted to, many of them would not buy the companies'
stock in the first place. Then, corporations would have trouble selling new
issues of stock when they wanted to start up or expand. Sometimes the
stockholders of a company sell their stock to the public. This is
called a secondary offering. In this case, the stockholders, not the
company, receive the money. The lower part of the diagram shows that the
stock market is made up of stock exchanges, the NASDAQ market, and the
over-the-counter (OTC) market. In 1992, there were over 50 million
people who bought stock. Brokers for all of these people cannot get
together in one place to trade stocks. Instead, many of them buy and
sell stocks through a stock exchange, or NASDAQ's computerized market.
A stock exchange is a marketplace where brokers called "floor brokers" buy
and sell stocks for their customers and for other brokers. On NASDAQ,
market-makers, working from securities firms all over the country, buy and
sell stocks for their customers and other brokers, via computers all linked
together. Thus, a stock exchange is simply a marketplace where listed
stocks, those that have been approved by the exchange for transaction, can
be bought and sold. Through the exchanges, representative of buyers and
sellers can meet to trade on behalf of t heir customers. These exchanges
function as auction markets. Prices are determined by an open auction
market in which the buyer's bid price- what buyers are willing to pay for a
particular stock at a particular time- and the seller's asked (or offer)
price- what sellers are willing to accept for a particular stock at a given
time- must come together. When these representatives, members of a
particular exchange such as NYSE or AMEX, agree on a price, a transaction is
made. There are nine stock exchanges in the United States. The
biggest is the New York Stock Exchange, located in New York City.
Brokers buy and sell stock in about 2,570 different companies at the NYSE.
In order for a company to have its stock traded here, it must make over $2.5
million a year and have sold over 1.1 million shares of stock. The
companies pay anywhere from $11,000 to $60,000 a year to have their stock
traded. The American Stock Exchange (AMEX) is located just a few
blocks away from the NYSE. Here floor brokers buy and sell stocks in
over 840 companies. In order for a company to have its tock traded on
the AMEX, it must make over $750,000 each year and pay a yearly fee of
$3,000 to $12,000. You can buy stock in over 30,000 other companies that
are not traded on the NYSE or AMEX. How? One way is through
regional stock exchanges located in cities such as Philadelphia, Boston, and
Chicago. Another way is on The NASDAQ Stock Market, based in
Washington, DC, and America's second largest market. More than 3,200
companies list on the NASDAQ market. To list on the NASDAQ, a company
must have at least four million dollars in assets, and have half a million
shares of stock in public hands. To list on the electronic market
companies pay a yearly fee of $5,000 to $20,000. Another way stocks are
traded is over-the-counter, or OTC. OTC stocks are any that do not
list on an exchange or market. They are often small companies without
lots of shareholders. Many large international companies trade their
stock over-the-counter in the United States because being unlisted saves
them a tremendous amount of paper work. Any company can trade over the
counter if it finds a market-maker at a securities firm willing to buy and
sell its stock. The market-maker will advertise his or her
prices in the "pink sheets" or on a computerized system called the
"Over-the-Counter Bulletin Board," or OTCBB. These prices are
indications of what the market-maker will buy and sell the stock for, and
they are often negotiable, particularly if someone is buying a larger amount
of stock. (Just as at a supermarket you often get a better price when
you buy the larger size.) These market-makers, or dealers, trade among
themselves and the public, both for their own accounts and for their
customers. Finally, the pink-sheet market is also part of the OTC market.
In this market, trades occur for stocks that are not part of NASDAQ or the
regular OTC market. Prices of these stocks are printed in a daily
"pink sheet" sent to brokers' offices. Complete the
following worksheet...
Click here for the worksheet.
Activity 3 |
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