This first half will deal with the foundational aspects - the important basics of the stock market and the NYSE
If you already know or are uninterested in the basics- Skip This Post- Current News Breakdown on Wednesday
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| The NYSE: Then and Now |
[Basics of How the Stock Market Works]
[Basic Explanation of the NYSE]
Quick Definitions:
Stock Market: Used here as a general term for any means by which stocks are bought and sold
Stock Exchange: The most important component of a stock market; a centralized organization that provides the market place or facility for the buying and selling of stocks and shares.
Beginnings of NYSE: May 17, 1792- 24 New York City Stock Brokers get together on Wall Street under a Buttonwood Tree and sign the Buttonwood Agreement- setting an official commission rate and agree to only deal with each other
1817: The New York brokers draw up a constitution and establish the formal NYS&EB (later changing its name to NYSE in 1863)
[Full Timeline If Interested]
Since then, it has gradually evolved and become a world center of trade and finance and an enduring symbol of American Capitalism
What is the NYSE? The Basics:
Just about every company, at some point, needs to raise money, usually to pay off debt or finance new investments - they can do this in 2 ways:
1) Borrow the money, through loans and issuances of bonds, called debt financing (issuing debt)
2) Raise it from investors by selling a stake in the company, called equity financing (issuing equity)
(which is what we're interested in here)
-With equity financing, companies raise money from investors by selling a part of the company, known as issuing stock, (note: there are different classes of stock, which differ on how and when a corporation will pay you as a shareholder) but the two main types are common stock and preferred stock - here we will focus on common stock, as the majority of stock is issued in this form
[Further Reading On Different Types of Stocks]
-The company offers this stock in a number of pieces, or shares, with each share representing an entitlement to a proportionate share of the company's earnings
-Companies can remain private and issue their stock privately for a more limited network of investors (most small businesses, though large companies can be private too) or "go public"and issue their stock publicly (for a large number of shareholders)
-Public companies have inherent advantages over private companies, i.e. it increases capital base, increases access to debt markets (for debt financing) and diversified ownership, but it also comes with increased costs, increased regulatory scrutiny, and less control for majority owners and company founders
'Going Public'
-Most companies looking to substantially raise capital (money for expansion) will consider entering the public market, as it is a way to generate funds that do not have to be paid back
-Going public does not mean 'free money,' though, as it costs money to make money, so companies need to perform an accurate assessment of their company as to whether they can afford it and ultimately succeed in such an environment
-The typical route to go public is called the Initial Public Offering (IPO), which involves the first sale of stock to the public
-This is a regulated process in which the company first is approved by and enters an agreement with a bank who acts as underwriter, assessing eligibility, of the IPO; financial and business information of the company is drawn up in a prospectus - [Prospectus Breakdown] - which is used to attract investors, the underwriter decides how much investors are willing to pay for shares in the company and usually finances the transaction and lines up investors, those shares then hit the market at a predetermined price typically to the clients and investors who have a relationship with the underwriting firm
-It is a long, expensive and complicated process [Typical IPO Process Breakdown]
Primary and Secondary Market
-Those initial shares are purchased directly from the company, this is known as the primary market
-The investors who buy these common shares, hold ownership in the company and are able to share in its earnings (proportionate to amount of company shares owned) and gain any voting rights attached to the stock, e.g. voting to elect board of directors: the individuals who represent the stockholders in company decisions (think: 1 share = 1 vote, more shares = more influence)
-Once those shares are purchased, the company that has undergone the IPO process is now a public listed company and its shares can now be bought and sold on the open market, this is known as the secondary market, or 'after market' in which investors can purchase securities from other investors (it can also issue new shares at any time in line with specific rules and regulations)
-The stock exchange is the most visible example of the secondary market
-There are a variety of different stock exchanges that a company can enter around the world, (e.g. London Stock Exchange, Bombay Stock Exchange, New York Stock Exchange, NASDAQ stock exchange [A Full List Broken Down Here]) each with their own requirements, or listing standards, that companies must meet (e.g. minimum thresholds for number of publicly traded shares, total market value, stock price, number of shareholders, requirements specific to US based companies and companies based abroad) in order to have their stocks listed and traded there (for the most part companies only enter one exchange, though there are companies that dual list)
Stock Exchange
There are 2 types of stock exchanges:
1) physical locations, with transactions carried out verbally on a trading floor (e.g. NYSE) - computers still play an important role, but there is a significant amount of human contact
2) virtual kind, composed of a network of computers where trades are made electronically through traders, no physical exchange (e.g. NASDAQ)
New York Stock Exchange (NYSE)
-There are many stock exchanges now around the world, the NYSE, a physical exchange, is the oldest and largest stock exchange in the US (in terms of trading volume) and one of the most important exchanges worldwide
-It is composed of 4 rooms used for the facilitation of trading
-As it is such an important exchange, it is very difficult and expensive to get in to
-The basic thresholds to qualify: $500 million in total value of all shares being traded, and $100 million in annual revenue - though this still does not guarantee you a spot [NYSE Detailed Listing Standards]
-Once in, a company must pay significant initial and annual fees as well as charges per a certain mass number of shares issued
-Currently there are 3,600+ companies traded on the NYSE
-The NYSE trades in a continuos auction format in which traders execute stock transaction on behalf of investors. Traders gather around the appropriate post where a specialist broker, employed by NYSE member firm, acts as auctioneer in an open outcry format, bringing buyers/sellers together and managing the auction  |
| The facade of NYSE draped in the American flag |
-There are many stock exchanges now around the world, the NYSE, a physical exchange, is the oldest and largest stock exchange in the US (in terms of trading volume) and one of the most important exchanges worldwide
-It is composed of 4 rooms used for the facilitation of trading
-As it is such an important exchange, it is very difficult and expensive to get in to
-The basic thresholds to qualify: $500 million in total value of all shares being traded, and $100 million in annual revenue - though this still does not guarantee you a spot [NYSE Detailed Listing Standards]
-Once in, a company must pay significant initial and annual fees as well as charges per a certain mass number of shares issued
-Currently there are 3,600+ companies traded on the NYSE
-It allows investors to buy/sell those stocks from anywhere as you can call a stock broker who does business with a particular exchange to buy/sell on your behalf with other brokers (brokers looking to buy when you're looking to sell and vice versa)
-This auction process moved towards automated exchange, use of computer programs for entering trading orders, in 1995 with the use of hand held computers - and this electronic trading method quickly picked up steam
-So much so that as of 2007, all stocks can now be traded via its hybrid market - the stock broker can either have his order executed immediately in a fully automated electronic exchange, or have it routed to the trading floor where it is completed manually via tradition live auction with a specialist broker
-Electronic trading, with its speed, has become the more preferred method for most customers, but the NYSE is looking for ways to redefine the role of specialist
-We will not go further into the auction process, or trader regulations - as this explanation has already been quite long and should be sufficient, if interested: [Watch this Informative Short Video Tour of NYSE Trading Floor]
-Current News on the Possible Global Merger Breakdown (Part 2 of 2) to come on Wednesday-
Thank you for this post! Having a job heavily involved with the NYSE, it was very helpful to have it broken down this way to really develop an understanding for where it is going. Keep em comin!
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