When individuals are trading securities in the markets, what exactly are they buying and selling? Securities are defined as investments traded on a secondary market, the most common of which are stocks and bonds. In this blog we will take a deeper look into what stocks are and how and where they are traded.
A stock is defined as a share in ownership of a company. If you own a company’s stock, then you own a part or fraction of that company. For example, if you own a share of Facebook, then you own a part of the Facebook company. A share of stock also has limited liability, which means that if Facebook were to file for bankruptcy, you can only lose the amount of your investment into the company (i.e. how many shares you own), but no more than that.
Where are Stocks Traded?
The next aspect of stocks to consider is where they are traded. U.S. stocks are traded most commonly on organized exchanges such as NYSE (New York Stock Exchange) and NASDAQ, but trading on electronic communications networks, some of which are operated by the exchanges themselves, is becoming increasingly more common. The New York Stock Exchange is obviously the most famous of all stock exchanges and most of the largest U.S. corporations trade on it. It is also more than 200 years old and is a floor-based exchange. Though the NYSE has modernized to computerized trading wherein the NYSE allows brokerage firms to place their servers on the floor of the exchange at a cost, it allows for the fastest transactions – i.e in milliseconds. Pertaining to that, DAS systems are co-located at NASDAQ and provide the most efficient execution solutions for a firm’s clients, broker/dealers, clearing firms, online brokers, institutional trading desks and traders worldwide that demand smarter and faster execution services.
NASDAQ, which stands for the National Association of Securities Dealers Automated Quotation System, is the first electronic stock exchange and is an institution. It divides its listed companies into three categories: The NASDAQ Global Select Market, which includes the 1,000 largest companies on the exchange; The NASDAQ Global Market, for companies that meet a market capitalization of at least $75 million; and the NASDAQ Capital Market, which is for companies that meet a market capitalization of at least $50 million. It is important for day traders to note that NASDAQ Global Select Market companies are the most liquid.
Lastly is the BATS Exchange, which stands for Better Alternative Trading System, and was founded to improve trade execution times and is now the third-largest exchange in the U.S. Several exchange-traded funds are listed directly on BATS. The National Stock Exchange is an electronic communications network that trades all exchange-listed equities. It is owned by the Chicago Board Options Exchange and a group of brokerage firms.
The last 25 years of the 20th century saw many changes in the equity markets. Specifically, the abolishment of fixed commissions, the move from physical to electronic trading floors and the development of electronic communication networks (ECNs) all have had substantial effects on how the world now deals stocks and on the professionals who facilitate those transactions. In addition is the consolidation of the twelve exchanges that occurred in the markets, and essentially changed the footprint of where stocks are most heavily traded or have the most liquidity by one conglomerate body at a time. The Nasdaq who used to be in the 2nd largest has been displaced by the Chicago Board of Exchanges with its recently acquired BATS/EDGE (both merged last year) making it now the 2nd largest market for equities. (http://markets.cboe.com/us/equities/).
NYSE still remains number 1.
1. NYSE 30.9% (NYSE, AMEX, ARCA)
2. CBOE 17.8% (BYX, BZX, EDGX, EDGA)
3. Nasdaq (NSDQ, PSX, BX)
The NYSE equities website https://www.nyse.com/products/equities) is a great resource and has explained this:
Stocks trade on multiple markets, but the listing venue has a unique responsibility to:
- Provide a well-regulated market. NYSE Regulation oversees our responsibilities to protect investors and the public interest.
- Establish displayed prices. NYSE’s unique market model provides deep liquidity and high-quality quotes that lower volatility and the issuers cost of capital.
- Provide price discovery during the opening and closing auctions. Our unique auction process with Designated Market Makers provides superior price-discovery.
This concludes the key aspects of defining what stocks are, why they are so important to day traders, and where they can be traded in the United States. Following this topic are two other major securities in the markets, which are bonds and ETF’s, or electronically traded funds.