A stock exchange
is an organization that provides a marketplace (either physical or virtual) for trading shares, where investors (represented by stock brokers
) may buy and sell shares in a wide range of companies. A given company will usually list its shares in only one exchange by meeting and maintaining the listing requirements
of that particular stock exchange. In the United States, through the inter-market quotation system, stocks listed on one exchange can also be bought or sold on several other exchanges, including relatively new internet-only exchanges. Stocks are broadly grouped into NYSE-listed and NASDAQ-listed stocks and exchanges where NYSE-listed stocks may be bought are generally not the same group as the exchanges where NASDAQ-listed stocks may be bought. Many large foreign companies choose to list on a U.S. exchange as well as an exchange in their home country in order to broaden their investor base. These shares are called American Depository Receipts (ADRs)
. Large U.S. companies also list in foreign exchanges for the same reason. Although it makes sense for some companies to raise capital by offering stock on more than one exchange, in today's era of electronic trading
, there is little opportunity for private investors to make profit on pricing discrepancies between one stock exchange and another. As such, arbitrage
opportunities disappear almost immediately due to the efficient nature of the market.
There are various methods of buying and financing
stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they are all doing one thing—arranging the transfer of stock from a seller to a buyer. Most of the trades are actually done through brokers listed with a stock exchange such as the New York Stock Exchange
There are many different stock brokers from which to choose such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a bank or credit union that may have a deal set up with either a full service or discount broker.
There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor's relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an initial public offering
in which the stock is purchased directly from the company, usually without the aid of brokers.
When it comes to financing a purchase of stocks there are two ways: purchasing stock with money that is currently in the buyers ownership or by buying stock on margin. Buying stock on margin
means buying stock with money borrowed against the stocks in the same account. These stocks, or collateral, guarantee that the buyer can repay the loan; otherwise, the stockbroker has the right to sell the stocks (collateral) to repay the borrowed money. He can sell if the share price drops below the margin requirement
, at least 50 percent of the value of the stocks in the account. Buying on margin works the same way as borrowing money to buy a car or a house using the car or house as collateral. Moreover, borrowing is not free; the broker usually charges 8-10 percent interest.
Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling
); although a number of reasons may induce an investor to sell at a loss.
As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, discount or full service, handles the transaction.
After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.
Stock Price Fluctuation
The price of a stock fluctuates fundamentally due to the law of Supply and demand
. Like all commodities in the Market
, the price of a stock is directly proportional to the demand. However, there are many factors
on basis of which the demand for a particular stock may increase or decease. These factors are studied using methods of Fundamental analysis
and Technical analysis
to predict the changes in the stock price