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Money, the Markets, & You

An Overview of the Stock Market

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Money, the Markets, & You
An Overview of the Stock Market
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Generally speaking, the stock market is an organized venue where buyers and
sellers meet to buy and sell stock. Think of it as being similar to a farmers
market. A farmers market is made up of various stands or booths where goods
are bought and sold; the stock market is made up of different exchanges where
people meet to exchange stock for money.
Historically, if a person wanted
to trade shares in a company, he
or she would physically take the
paper certicate of shares to an
exchange to buy or sell. However,
as more people became involved
in trading, it was obvious that not
every buyer and seller could t into
one location and nd someone else
interested in buying their stock.
This is why brokerage houses were
created. Brokerage houses keep a
place on the exchange and trade
the stocks on behalf of their clients.
In fact, to trade stocks on an exchange, you must trade through a brokerage.
You deposit money in the brokerage account, and your broker will buy and sell
your shares as you direct. When you want your money out, they will send it to
you at your request.
There are several ways to invest in the stock market:
You can hire an investment advisor or full service broker and have him
or her call the shots for you.
You can do the research and select the stocks on your own using a
discount broker or online broker, or buy directly from the company if the
company has a Dividend Reinvestment Plan or Direct Investment Plan.
Stock Symbols
Stock symbols, also called ticker symbols, are letters used to identify a stock or
a mutual fund. Up to 3 letters are used for stocks listed on the major exchanges.
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Four letters are used for NASDAQ stocks. Five letters are used on NASDAQ for
other than single issues of common stock.
These symbols are a group of letters or usually acronyms of the companys
name. For example, the General Electric Company is listed on the New York
Stock Exchange (NYSE) under the ticker symbol GE. In another example, the
ticker symbol for the Ford Motor Company is simply the letter F on the NYSE.
Stock symbols for every publicly traded company are available to all investors.
Each exchange lists the companies on the exchange and their stock symbol on
their website. Additionally, the stock symbol will be included in the companys
prospectus in the stock section.
The Exchanges
Lets take a look at some of the major stock exchanges where stocks can all
be bought, sold, and traded in the United States and worldwide markets. For
our purposes here, we will focus
only on the four major stock
exchanges: the New York Stock
Exchange (NYSE), the NASDAQ
Stock Exchange (NASDAQ),
the American Stock Exchange
(AMEX), and the Over-The-
Counter Bulletin Board Stock
Exchange (OTC.BB).
Thousands of different publicly
traded companies are bought
and sold every day on these
exchanges. They all perform similar
functions, including the listing,
trading and clearing of securities.
However, the procedures they follow for how they list, trade, and clear securities
vary from exchange to exchange. For example, some exchanges still trade
through live outcry in a pit, but electronic execution of orders has dramatically
affected the markets in recent years, allowing for the quick execution of many
millions of shares traded with great efciency.
The NYSE and AMEX exchanges operate through live outcry. These traders
(also commonly referred to as market-makers) are the people you may see on
television running around the trading oor waving bits of paper and shouting
out prices. The outcry format here has stayed constant since these exchanges
were rst established, although technology has improved the overall process.
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The NASDAQ and OTC.BB differ from the live outcry format. All buy or sell
orders are handled through a nationwide computer network. Although NASDAQ
is located in New York City, there is no trading oor to speak of. All transactions
run through this electronic system, which generally makes order execution on
NASDAQ-traded stocks faster than on NYSE stocks.
All exchanges, regardless of format, are open from 9:30 a.m. to 4:00 p.m.
Eastern Standard Time.
Before we move onto our next topic, sectors, the following information will
familiarize you with additional details about these major exchanges:
Perhaps the best-known market
in the United States is the NYSE.
This is where stocks are bought
and sold in several of the nations
largest companies. Located on
Wall Street in New York City, the
NYSE is one of the largest open
call trading markets in the world.
Stock traders crowd the Trading
Floor and literally hustle all day
long, buying or selling shares of
common stock.
On the NYSE, daily trading is
conducted like an auction. Traders
holler out bidding and asking prices in accordance with quotes written down
on order slips. These slips are actually palm-size pieces of paper containing
instructions from institutional and individual investors.
These orders are executed and displayed in a continuous ow of symbols
and gures up on the Big Board, a huge electronic tally streaming constantly,
hanging up on the South Wall of the building.
To a beginner, trading activity might seem like its taking place in an arena
dominated by secret codes and fractional math. To some, outright chaos seems
to be the order of the day down on the Trading Floor. However, the fact is that
traders keep rm control on a market that totals many transactions every day.
Even more surprising is that all sales transactions are processed at one counter
down on the oor, thus giving all investors, both large and small, a fair chance at
recording their purchase or sale.
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When trading stops for the day, tons of palm slips signifying the transaction of
billions of dollars and the hopes of millions of investors are swept up from the
trading oor.
The National Association of Securities Dealers Automated Quotations, or
NASDAQ, is a completely computerized stock exchange. A huge display of the
computerized screens listing stocks traded on NASDAQ is also located in New
York City near Times Square.
Part of the history of the NASDAQ includes the formation of the National
Association of Securities Dealers, Inc. (NASD), a national securities association
formed under the Securities Exchange Act of 1934, Section 15A. The NASD
Board sets guidelines for markups and commissions in customer transactions.
Trading on the NASDAQ can take place anywhere a licensed security dealer can
transact a trade by computer on behalf of a customer.
Brokers and dealers usually list these stocks directly with one another over
computer networks and by phone, and these trades are monitored by the NASD.
The NASDAQ consists of the NASDAQ National Market, the NASDAQ
SmallCap Market, the National Market System (NMS), and the Over-The-
Counter (OTC) market.
Many of the companies in the very large OTC stock market are capitalized at
a fraction of those companies that are traded on other markets. In fact, some
really do sell their shares for under $1 per share.
The OTC.BB was created by the NASD and gives investors information for
the securities that are not listed on any national exchange. In other words,
companies that do not meet the minimum requirements of any other market
may be listed on the OTC. These particular stocks are not posted on the
electronic exchange because they fall short of certain SEC listing requirements.
Trading in this market is usually done over the telephone with investors
buying either directly from a dealer or using a broker to search the market for
the best price.
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This electronic exchange traces its trading roots to the American Stock Exchange
headquartered in New York City. The AMEX uses wireless, handheld terminals on
the trading oor, allowing for instantaneous order processing and reconciliation.
In 1998, the NASD and AMEX merged, creating the NASDAQ-AMEX Market
Group. NASD is the parent company; however, the AMEX still operates as an
independent entity.
Now that we have learned a little bit about the major stock exchanges, lets take
a look at how the broad list of stocks on those various exchanges is organized.
The rst category in which stocks are organized is called Sectors. Sectors
are typically broad divisions of the companies that make up the market. The
following are examples of sectors:
Basic Materials
Capital Goods
Consumer Cyclical
As we examine the sectors, it can give us an indication of where money is
owing in and out of certain areas of the market. If we are bullish, we will look
for the best performing sectors. When we are bearish, we will look for the
poorest performing sectors.
Sectors are further divided into industries.
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An industry will t within a sector, and the industries are more specic than the
sectors in which they belong. For example, the technology sector is divided into
the computer hardware, computer software and services, electronics, Internet,
and telecommunications industries.
Industry Groups
Industries are further broken down into Industry Groups, which are even more
specic and narrow in their focus. For instance, if we took the Internet industry,
we could break this down into industry groups such as ISPs (Internet Service
Providers), Internet software and services, etc. Similarly, if we took an industry
such as insurance, we could break this down into industry groups such as
accident/health insurance, insurance brokers, property/casualty insurance, life
insurance, and surety/title insurance.
It is important to mention that not everyone agrees on what the makeup of
sectors, industries and industry groups should be. Dow Jones and Standard &
Poors are just two examples of highly respected market research and tracking
rms that have both set up their own market organization standards. You
will notice some discrepancies as you compare information between various
institutions, as they may differ in their denitions of what constitutes a sector,
industry, or industry group. It is also common to see all of these categories
labeled simply as sectors.
Finally, you will also see indices. An index is made up of a collection of
stocks that are typically representative of a broader market. For example, the
semiconductor index is made up of 16 stocks in the semiconductor industry
group, while the Dow represents a view of the broad market and consists of 30
different stocks. Each index represents a different view of the broad market.
There are many statistical indices to help investors follow the short-term and
long-term progress of stocks traded on all of the world markets. All of the
indices are mathematical composites of the markets activity on any given hour
of each trading day.
Investors use these indices to determine whether or not the value of the stock
they own will be heading either up or down. Over time, the numbers generated
by the indices can provide an investor with a general picture of the markets
overall performance.
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Today, stocks are routinely
considered investment vehicles,
even by conservative investors. The
circle of investors has widened far
beyond the Wall Street cliques
of the past century to millions of
everyday working men and women
all over the world.
As an example of indices and
how they seek to provide market
information to investors, lets take a
look at two main indices: the Dow
Jones Industrial Average and the
Standard & Poors Index.
Now that we know a little bit more about the stock market, indices, and the
breakdown of the market, such as in sectors, lets take a look at two examples of
groups of stocks: ETFs and HOLDRS. Each are traded on the AMEX.
According to AMEX.com, an Exchange Traded Fund (ETF) is a basket of
securities that is designed to track an index (broad stock or bond market, stock
industry sector, or international stock), but trades like a single stock.
Likewise, HOLDRS (Holding Companies Depository Receipts) make it possible
to have ownership in a group of stocks with just one investment. They are
securities that represent an investors ownership in the common stock or
American Depository Receipts of specied companies in a particular industry,
sector or group. HOLDRS are a trust and trade in 100-share blocks.
The More You Know
You can learn a great deal more about the stock market and investing by visiting
This report has been designed to give you a very broad, generalized view of the
markets where the majority of trading occurs. As with any investment, trading
stock carries with it an element of risk. In order to reduce your risk, it is vital that
you receive the proper training and instruction.
Rich Dad Education is the ideal place to receive such training. Rich Dad
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Education will present you with an easy-to-follow, proven system that can help
you learn how to increase prot potential and minimize risk. Our training can
teach you how to prot whether the market is going up, down or sideways.
For complete information on Rich Dad Educations training opportunities,
you are encouraged to call 1-866-890-7608 toll-free and speak to one of our
We wish you success!