In this paper, it begins by an interpretation of the role and functioning of stock markets, the New York Stock Exchange is represented in this case. Firstly, it goes through the history of the NYSE, it explains its administrative structure. An overview of the advantages of the stock exchange for both investors and corporations is provided. It analyzes the question of efficiency of financial markets.
What is stock exchange?
An organized marketplace for securities featured by the centralization of supply and demand for the transaction of orders by member brokers for institutional and individual investors."
(ref: glossary from www.nyse.com)
The stock exchange or stock market is where equities are bought and sold between buyers and sellers. The stock market or equity market is considered as a Capital market as it facilitates the flow of long-term funds. Then, Capital market can be divided in Primary Market and Secondary Market. The Primary market is used by Corporations for issuing new stocks (or long term debt) in order to raise capital or fund, while Secondary market assures the trading of existing stocks. It is a means of trading stocks for stocks brokers, traders and dealers. The main purposes of the secondary markets are its liquidity and share valuation. Investors holding stocks from the first issuance in the primary market but do not want to keep them. They can sell them in the secondary market to others who want to acquire them. There are two types of stock on the market that are preferred stocks and common stocks. Preferred stocks
Preferred stocks pay a fixed dividend regardless of corporate earnings and have priority over common stock in the payment of dividends. Preferred stockholders also have priority over common stockholders in recouping their investment if the company fails or liquidates. However, preferred stock carries no voting rights and, should earnings rise significantly, the preferred holder receives the same fixed dividend while holders of common stock may collect more. The fixed income stream of preferred stock makes it similar in many ways to bonds.
Securities that represent an ownership interest in a corporation. If the company has also issued preferred stock, both common and preferred have ownership rights. Common stockholders assume the greater risk, but generally exercise the greater control and may gain the greater award in the form of dividends and capital appreciation. The terms common stock and capital stock are often used interchangeably when the company has no preferred stock.
Process of trading
Advantages to be listed on stock exchange for corporations
Creating a market for the company’s shares
Enhancing the status and financial standing of the company
Increasing public awareness and public interest in the company and its product
Providing the company with an opportunity to implement share option schemes for their employees
Accessing to additional fund raising in the future by means of new issues of shares or other securities
Facilitating acquisition opportunities by use of the company’s shares
Offering existing shareholders a ready means of realising their investments
Companies seek a listing on the exchange to raise new finance for the company and/or its owners; for example, the new finance that is needed to assist expansion may be best raised by the sales of shares in the company rather than taking on debt finance.
Advantages to invest in stock market for investors
Common stock has a number of advantages which make it a desirable investment vehicle, some of which are listed below:
A¢â‚¬A¢ Common stock has the potential for delivering very large gains, unlike bonds, Certificates of Deposit, or some other alternatives. Annual returns-on-investment (ROIs) of over 100% have occurred on a somewhat regular basis.
A¢â‚¬A¢ The potential loss from stock purchased with cash is limited to the total amount of the initial investment. This is considerably better than that of some leveraged transactions, where the maximum loss can well exceed the total of the funds invested.
A¢â‚¬A¢ Stocks offer limited legal liability. Passive stockholders (those who take no active part in the running of the company) are protected against any liability stemming from the company’s actions beyond their financial investment in the company.
A¢â‚¬A¢ Most stocks are very liquid; in other words, they can be bought and sold quickly at a fair price.
A¢â‚¬A¢ Although past performance is not a guarantee of future performance, stocks have historically offered very high returns in relation to other investments.
A¢â‚¬A¢ Stocks offer two ways for their owners to benefit, by capital gains and with dividends. As previously stated, each share of stock represents partial ownership in a company. If the company becomes more valuable, so will the ownership interest represented by each share of stock. This appreciation of the stock’s value is known as a capital gain. In addition, if the company earns more profits than it needs to support its maintenance and growth, it may elect to distribute the excess to its owners, the shareholders. The periodic distributions of profits are called dividend payments.
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