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Understanding Stock Exchanges: A Comprehensive Guide

Welcome to O1ne Mortgage’s guide on stock exchanges. In this article, we will explore how stock exchanges work, the different types of stock exchanges, and how you can buy stocks on a stock exchange. For any mortgage-related needs, feel free to call us at 213-732-3074.

How Stock Exchanges Work

A stock exchange is a marketplace where investors trade stocks and exchange-traded funds (ETFs). While the New York Stock Exchange (NYSE) and the Nasdaq are well-known, there are other exchanges available for trading investments. Here’s what you need to know.

Stock exchanges are hosted by institutions. For instance, the Nasdaq is owned by Nasdaq Inc., and the NYSE is operated by Intercontinental Exchange. Together with the U.S. Securities and Exchange Commission (SEC), these organizations set rules for companies to list their stocks for trading.

To be listed, a company must first make an initial public offering to institutional investors, such as investment banks. Afterward, shares become available to individual investors through brokers. Other listing requirements include a minimum stock price, market capitalization, and transparent financial reporting.

Stocks can be traded on multiple exchanges simultaneously. Besides the NYSE and Nasdaq, other U.S. exchanges include the Philadelphia Stock Exchange, the Boston Stock Exchange, and the NYSE Arca. Other countries also have their own stock exchanges.

Stock Exchange Participants

While you can buy and sell stocks and ETFs on a stock exchange, you generally can’t do so directly. Here are the four main participants in an exchange:

• Brokers: Individuals and firms that buy and sell stocks and ETFs on behalf of other investors.
• Dealers: Individuals and firms that buy and sell stocks and ETFs for themselves.
• Broker-dealers: Individuals and firms that act as both brokers and dealers.
• Market makers: Individuals and firms that act as intermediaries, maintaining liquidity by buying and selling stocks and ETFs.

Types of Stock Exchanges

There are various types of markets where you can buy and sell stocks and other securities. Here’s a quick summary:

Auction Markets

In an auction market, trades are made based on the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. The NYSE is an example of an auction market.

Dealer Markets

In a dealer market, such as the Nasdaq, dealers post prices at which they’ll buy and sell stocks, acting as market makers. Bonds, foreign currency, and derivatives may also be traded in dealer markets.

Alternative Trading Systems

Alternative trading systems (ATS) function similarly to exchanges but don’t have the same regulatory standards. An ATS can trade both listed and unlisted stocks, including penny stocks and bonds.

How to Buy Stocks on a Stock Exchange

While some stock exchanges have physical locations, like the NYSE’s trading floor in New York City, you can’t just walk in and buy stocks. Instead, you’ll need to work through a stockbroker, who acts as an intermediary between you and other investors, dealers, and market makers.

You’ll decide how many shares of a stock or ETF you want to buy or sell based on the current price, and the broker will facilitate the trade. The most common types of stockbrokers include:

• Direct market access brokers: Provide direct access to the exchange, ideal for active traders but more expensive.
• Discount brokers: Offer the cheapest transactions, generally with no commission, suitable for self-directed investors.
• Full-service brokers: Provide comprehensive investment advice and financial planning services, typically at a higher cost.

Frequently Asked Questions

What Are the Major Stock Exchanges?

The major stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq.

What Is the Difference Between Stock Exchange and Stock Market?

A stock exchange is a specific marketplace for trading stocks, while the stock market encompasses all exchanges where stocks are traded.

How Do Stock Exchanges Make Money?

Stock exchanges make money through listing fees, transaction fees, and other services provided to traders and companies.

The Bottom Line

A stock exchange is a network where buyers and sellers of stocks, ETFs, and other securities can meet to trade. While the inner workings can be complex, buying and selling stocks can be as simple as talking to your financial advisor or submitting an order through your online brokerage account. Regardless of your approach, it’s crucial to develop an investment strategy based on your financial goals and create a diversified portfolio.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help!

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