Section 1. The Securities Markets
Description
This article is from the What Every Investor Should Know.
Section 1. The Securities Markets
The term "securities" encompasses a broad range of investment instruments, including stocks and bonds, mutual funds, options, and municipal bonds. Investment contracts, through which investors pool money into a common enterprise managed for profit by a third party, are also securities.
Securities are bought and sold in a number of different markets. The best known are the New York Stock Exchange and the American Stock Exchange, both located in New York City. In addition, six regional exchanges are located in cities throughout the country. Corporate securities may be traded on an exchange after the issuing company has applied and met the exchange's listing standards; these may include requirements on the company's assets, number of shares publicly held, and number of stockholders. Organized markets for other instruments, including standardized options, impose similar restrictions.
Many securities are not traded on an exchange but are said to be traded over the counter (OTC) through a large network of securities brokers and dealers. In the National Association of Securities Dealers' Automated Quotation System (NASDAQ), operated by the National Association of Securities Dealers (NASD), trading in OTC stocks is accomplished through on-line computer listings of bid and asked prices and completed transactions. Like the exchanges, NASDAQ has certain listing standards which must be met for securities to be traded in that market.
Investors who buy or sell securities on an exchange or over the counter usually will do so with the aid of a broker-dealer firm, where their direct contact will be with a registered representative. This professional, often called an account executive or financial consultant, must be registered with the NASD, a self-regulatory organization (SRO) whose operations are overseen by the Securities and Exchange Commission (SEC), and with the states in which he or she is conducting business. The registered representative is the link between the investor and the traders and dealers who actually buy and sell securities on the floor of the exchange or elsewhere.
Market prices for stocks traded over the counter and for those traded on exchanges are established in somewhat different ways. The exchanges centralize trading in each security at one location--the floor of the exchange. There, auction principles of trading establish the market price of a security according to the current buying and selling interests. If such interests do not balance, designated floor members known as specialists are expected to step in to buy or sell for their own account, to a reasonable degree, as necessary to maintain an orderly market. In the OTC market, brokers acting on behalf of their customers (the investors) contact a brokerage firm which holds itself out as a market-maker in the specific security, and negotiate the most favorable purchase or sale price. Commissions received by brokers are then added to the purchase price or deducted from the sale price to arrive at the net price to the customer. In some cases, a customer's brokerage firm may itself act as a dealer, either selling a security to a customer from its own inventory or buying it from the customer. In such cases, the brokerage firm hopes to make a profit on the purchase and sale of the security, but no commission is charged. Instead, a retail "mark up" is added to the price charged by the firm when a customer buys securities and a "mark down" deducted from the price paid by the firm when a customer sells securities.
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