Tuesday, November 6, 2007

Process to Choose a Stock Broker

The advent of technology and automation has spread their wings
in every sphere. Similarly in the field of stock market it has
left a deep impact. The "open out-cry system" that prevailed few
years ago in the security market has been replaced by computerized
broking system. The brokers are the middlemen between the customers
and the stock exchange.

The question may arise that what is the source of revenue for the
brokers? The answer is simple one - the brokers earn their bread
through charging commissions on every transaction passed through them.
Such commission is better known as "brokerage". It is charged against
the service that a broker renders to its customers. However, in this
respect it should be borne in mind that brokers of
Indian Stock Market
often provide advisory services, regarding how to invest and where
to invest, but hardly charge for that.

This was all about a brief introduction of a broking firm; now the most
important question that crops up is how to choose a stockbroker? To play
safe in the market, you should get hold of a broking firm keeping the
following guidelines in mind.

SEBI Registration: The very first thing that you should look
for while choosing a stock broker is whether it is registered under
the Securities and Exchange Board of India(SEBI).
If the Broker is registered under SEBI, then it remains accountable to
you at every point of time. If you, ever, face any difficulties with
a particular broker then you can directly intimate such to the
regulatory authority, SEBI.

Self Planning: The next important thing that you should keep
in mind is your investment goals and the kind of services you are
looking for. Different brokers offer varieties of services, which
may not match with your need. Thus, before going for a stockbroker,
go through their service details.

Broker's Objectives: You should also remember to make a
thorough inquiry about the investment philosophy of a particular
broker that you choose and its procedure to handle clients.

Types of Brokers:There are mainly two types of brokers;
discount brokers and full-service firms. Generally, the discount
brokers often engage themselves in buying and selling with a low
commission rate but hardly render any advice to their customers.
On the other hand, full service brokers have the potential to
operate with you on different investment policies. In such ways you get
the opportunity to implement your plans more effectively and efficiently.
Thus, keeping these two types of brokers in your mind, you need to make a
wise and balanced judgment and go accordingly.

Track Record of Broker:The most effective procedure that
you can initiate while selecting a broker is applying the referral
procedure. In simple word it means, consult your friends and
relatives, who are already registered under a broker, about the
best broker that you can go for. Always ask your broker to provide with few
names of the clients they are dealing with, having the same background and
investment plans as you have.
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The Ultimate Stock Trading Tip - Myth or Reality?

It is commonly reported that the stock market averages about 10% per year return over the long term (decades). We’ve all heard of the stock market and probably have a general idea of what it is and how it works either from high school economics classes, television financial reports, and the countless film depictions of what happens on the floor of the New York Stock Exchange. As savvy stock market investors know, chasing after the one "hot stock" with the possibility of bringing instant riches is not a wise idea.

So, whilst the Stock Market is your best friend (trust me on this one) - the people who operate it may simply be their own best friend, and from your point of view, any advice you receive from them should be taken with a very large pinch of salt. This is the first in a series of articles about the Stock Market and what it can do for you - if you learn to love it allow it to be your friend.

The key to potential trading success and finding the stock market price for entry that is best for you is having a well-defined goal, the methodology to potentially meet that goal, and the discipline to stick with it. It is interesting and amazing to note that not until Charles Dow started compiling the Dow Jones Industrial and Dow Jones Rail Index and started writing about the stock market a little over a hundred years ago, stock speculation was regarded merely as a game for the rich or as gambling for the brave. Because I started to be cautious about investing as early as April 1998, since I thought that price/earnings ratios for the stock market were perilously high, I was not hurt personally by the "Crash of 2000" and had tried to get my clients into less aggressive and more liquid positions in their investment portfolios.

Even if you do not have large sum of money right now as principle to make really big profit out of value investing, you still want to start value investing early so that you can learn in and out of value investing in your earlier years of investing in the stock market. The nicest thing about value investing is that it will not distract your regular job if you choose not to stare at the stock market frequently in your office. When investing in the stock market, it is essential to have a sound set of rules or a system that has been tested in real time, no back testing or historical testing needed.

You may have heard people refer to “playing” the stock market as if it were all a big game of Monopoly. You must learn entry and exit of the stock market just as the divers in Acapulco have learned the correct moment to jump off the cliff.

What exactly does a stock market formula do? Whilst a stock market education firm's licence does not permit them to give investment advice (personal financial product advice), it is something we are frequently asked to provide. The stock market can be a great investment tool, but many people find themselves unsure of whether or not to invest in the market because they are unfamiliar with some of the more common terms associated with market trading.

Many people are afraid to invest in the stock market because they're afraid that they'll be scammed by a fraudulent stock broker. A stock market analyst is an individual, sometimes as a part of an investment firm, whose job it is to watch the changes in the market and keep track of which stocks and bonds are performing well and which ones aren't. If you find a stock that seems interesting but you aren't sure if it's legitimate, take the time to do a little bit of research on both the company that issued the stock and the performance of the stock in the market.

If you think that you might be interested in hiring a stock market analyst but aren't sure how you would go about doing so, then the information below should help you begin your search. These days, I usually begin my search for stock market gold by scrutinizing a company's fundamentals and choosing the best of the best.
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4 Major Stock Investing Mistakes

When it comes to investing, I can promise you one thing: you will make mistakes. Ask any experienced investor, and he’ll admit some major failures as well. You’d better get mentally prepared for it. Having said that, there are a few mistakes any new investor seems to make. I’m happy to show you the four most common mistakes made by newbie’s and how to avoid them. Buckle up - here we go.

Mistake #1 - Start too late
You are never too young to start investing in the stock exchange. Get started as soon as humanly possible.

The perception of investing is that it’s limited to grey haired, financially established men (not women!) who can invest great amounts of money. This is a major misconception. And even worse: it’s limiting people (you?) from exploiting the power of making your money grow and grow and grow. Start today. Now.

Why such a hurry? Waiting to start investing will make an immense difference in your financial destiny. Want proof? Investing $2000 a year (that’s barely $170 a month) starting at the age of 36 and an ARR (Annual Return Rate) of 10% can yield $802,895 at the age of 75. Nice amount of money right? Well, it could have been better. Much better. If you had started at the age of 26, that same investment would have resulted in a return of $2,114,379.

Let me do the math for you: the same investment, with the same ARR but with a 1.3 MILLION dollar difference…

Not able to invest as much as $160 a month? Set aside $100. Or even $25. Believe me: even this small amount can have a large impact in the long run.

Ready for Mistake #2? Here we go. It’s a fundamental mistake made by the overwhelming majority of new investors. Promise me one thing. After you’ve read this article, ask yourself this question: would I have made this mistake? Be honest. I’ll give you my answer before you even know the question: yes, I made that mistake as well. Ready?

Mistake #2 - Not Understanding The Company
It’s shocking! Most people will put more time, energy and research into buying a blender than they will in buying stocks. Of course, they take a quick look at what the stock price is doing, but there it stops. It is however imperative that you take the time to interpret the financial history of the companies you wish to participate in by buying shares. It’s important that you can explain what you are buying, why you are buying and how it will benefit you in the long run.

Having said that, it’s also crucial to stay objective while selecting stocks. Forget the story about the monkeys who are outperforming investment pro’s. In the long run (and that’s what you are after) the pro’s will always come out on top. It’s almost a law of nature: stocks that you’ve researched well and carefully selected are more likely to do better than stocks you choose based on a feeling. So put your emotions aside and consider your options carefully. Like Nike? By their shoes, but not necessarily Nike shares.

Another poor judgment issue - let’s say it’s Major Mistake #2a.
When choosing a financial coach or advisor, also take time to research and investigate. Consider meeting with a couple of candidates. Talk to them about their approach to investing. See if they understand what you’re looking for. And one last tip: if you are meeting with someone on a recommendation, make sure that the person who recommended the advisor is someone who’s qualified to do so. How? Just ask how his shares are doing…

Ok, Mistake #3. You’ve probably heard this a gazillion times before. And for a very good reason. It’s a recipe for disaster. And it is also one of the most neglected and violated rules of investing. Why? Not because investors are stupid, but because they are either lazy or greedy. Or both…

Mistake #3 - Putting All Your Eggs In One Basket
Don’t underestimate this old adage. In any portfolio, you will want to diversify your holdings. Spread your money not only over several different companies but also over different industries.

Why people ignore this rule? Most common reason is laziness. Let’s face it, its harder to find four promising companies than one. It’s harder to find three industries with an upbeat future than one. It takes work to built a diversified portfolio. Most people hate work. They’re after the lazy dollars.

Another reason why most investors have a very thin focus is good old fashioned greed. Suppose you have a portfolio with say five different stocks. One is slow. Three are doing ok. One is making you a small fortune. What do you do next? Sell the slow and average performing shares and invest your dollars in number five? Or do you believe in your initial game plan and stick to it? The fact is that most investors fall for the low hanging fruit – not seldom to find it was already harvested and the rally didn’t last. What they end up with, is a few eggs in a very expensive basket…

Saved the best for last. Major Mistake #4. But… you will probably not like this closing part. It undermines the reason most people (you?) start to invest in the first place. But please, please, please take my advice. It will save you from big disappointments and maybe even from going bankrupt.

Wow.. THAT serious? Yes, THAT serious! Get ready for a reality check.

Mistake #4 - Confusing Wall Street for Las Vegas
I guess I do not have to explain the fundamental differences between Wall Street and Las Vegas. But since you are fully aware of that difference, then why the [censored] do you (Oh no, not you of course, just those other guys) keep confusing gambling and speculating with investing?

Investing in stocks is part of a long-term financial game plan (game – bad choice of words by the way!) and not a get-rich-quick scheme. Day trading for example, has nothing (nothing!) to do with investing. Sure, you can make good money from it – when you know what you are doing and threat it like a J*O*B.

Sure, living the fast lane can be fun. And extremely profitable. But don’t ever say your are ‘investing’ your money. Your speculating. Gambling. If you feel attracted to it, set apart some ‘gambling money’ and make sure you can afford to lose it up to the last penny. Or don’t even bother and go to Las Vegas straight away to have some fun.
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Stock Market Basics

Stock markets represent and portray the commercial and economical strength of a country. The economy of a country relies on the stock market to a great extent, since they trade in the stocks of major companies. These markets are the source of capitalism in the United States. They play an important role by raising funds for companies. Being a part of a stock exchange may seem complex to many, but you can be a part of any popular stock exchange, either with the help of a brokerage account that can be opened online, or by interacting directly with the exchange.

A stock market is a place where people who want to earn money through investment, and companies who can provide those investment opportunities, come together. The trading and investing of stocks takes place in this market. Companies need funds and in order to raise funds, they issue stocks in the form of shares in which you invest, to earn money. If the company earns profit, then you as a stockholder of that company will also get a share in that profit.

You can gain a lot on the selling floor of a stock market. It is necessary, however, for you to understand the basics of a stock market, what its roles are, and how it works. For this, a proper study of all the possible market moves is essential. This needs constant appraisal, as the market moves very fast, and there are many ups and downs involved.

Stock markets are fraught with risk. Therefore, be it trading or investing, you need to proceed with caution. It is advisable to analyze a company’s profits and cash flow, the services it offers and the profit distribution pattern it follows, before investing in its stocks. If you are confident that the shares are commercially viable, you can go ahead and make an investment.
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Beside the profit incurred through the sale and purchase of stocks, you can also get the benefit of dividends that profitable companies offer. As an investor, you ought to know that blue chip stocks, income stocks, defensive stocks and growth stocks are several groups under which the future shares of companies are divided.

Big companies that pay dividends without fail, and have a record of growth in profit, have their shares referred to as blue chips. You can also invest in income stocks because the companies that issue these stocks pay high dividends, and have a stable earning in the market. Growth stocks grow very fast, but may fetch you nil or minimal dividends. In order to minimize your risk you can invest in defensive stocks as their value remains constant even if the market falls.

Companies can also issue their shares abroad with the help of banks. If you are planning on investing in stocks then try to invest in companies that offer dividends along with discounts. You can do the purchasing through the brokerage, or dividends, or a direct investment plan. Since a lot of people buy shares and stocks there is a cycle of supply and demand. Depending on this cycle, various fluctuations take place in the stock market. So, try to immunize yourself from these fluctuations by investing wisely.

The stock market not only provides you, as a trader or investor, an opportunity to purchase or sell shares or stocks, but also plays an important role in maintaining the cash flow in the economy of a country. If you are interested in making money in stocks, then it is recommended you learn the basics of stock markets before leaping in.
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Stocks - Getting Started in the Market

Hollywood loves the stock market. The chaos of the stock exchange floor, the tension of boiler room day-trading, devious power brokers making back room deals; it all makes for great drama. Then you have the true-to-life stock market stories in the news: insider trading, big money IPOs, the dot com bust. All of it is enough to make you steer clear of the market for good and travel down a safer investment path. But don’t be frightened, history shows that long-term, there’s no better place to put your money to watch it grow. Here are a few tips to get you started.

Stocks 101

Simply put, when you purchase stock in a company, you become part-owner of that company. Along with other shareholders, you all combine as investors in the business, and therefore reap its rewards, or suffer its losses. Stocks are most commonly divided into separate categories depending on the size and type of the company (e.g., mid-cap, small-cap, energy, tech, etc.).
While speculation can drive stock prices in the short term, it’s long-term company earnings that determine a stocks gains or losses. Speaking of short term, that’s when stocks are extremely volatile. Over a span of just a few months or years, stocks can climb to astronomic heights or drop to pitiful lows. But, since 1926, the average stock has returned over 10 percent per year. That’s better than any other investment vehicle out there, and that’s why stocks are your best bet for long-term investment.

Picking Stocks

Before you dive head-first into the market, there are a few things you should know about picking stocks. First, the market’s performance as a whole is not necessarily a reflection of its individual stocks. Good stocks can keep growing even in a down market, while bad stocks have the frustrating tendency to drop or remain stagnant in a strong market.

Also, remember that history is not indicative of a stock’s future performance. Even solid stocks can slip from time to time. Remember that stock prices are based on a company’s earnings outlook, not its past performance. If the future looks bright for a company, a $100 dollar stock is probably a good buy. If earnings look less than promising, even a $5 stock can be a waste. Finally, investors determine a stock’s value by measuring a handful of primary criteria, most notably cash flow, earnings, and revenue.

“Diversify”

It’s the rallying cry of all smart investors. When compiling an investment portfolio of stocks, it’s smart to own shares in companies from several different industries. Consider it a “hedge bet”. When one part of the economy experiences a downturn, you’ll have other stocks in your portfolio to put your faith in.

When building your portfolio, the safest bet is to pick from financially strong businesses with earnings growth above the average. Surprisingly, that limits the lot to choose from, as only around 200 stocks today fit that bill. A solid portfolio features somewhere in the ballpark of 20 stocks selected from seven or more industries. A general rule of thumb is to invest in stocks with an above-average rate of growth and reasonable valuations.

Buy and Hold

Day trading is a great way to lose your nest egg, but quick. As we noted before, stocks over the short term are highly volatile. Sure, brokers today are offering cheap trades, but beware. There are a ton of hidden fees and taxes involved with day trading, not to mention the amount of attention required by you to monitor the blow-by-blow proceedings of the market. Our recommendation: buy and hold. A ten percent return over the long term is nothing to sneer at.
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Wednesday, October 3, 2007

The New York Stock Exchange

Trading On The “Big Board”
Not only does Wall Street news dominate the daily reports on TV and in the papers, it has a prominent place in the annuls of American history as well. One of the pillars of Wall Street has been the New York Stock Exchange. With a history that can be traced back to 1792 and a lineage that dates to March 8, 1817, the New York Stock Exchange is an integral part of not only the stock market but of Americana as well.

From its strategic location on Wall Street, the New York Stock Exchange has become the largest stock exchange in the world and with its listing of nearly 2,800 securities; it is also the second largest based on this measurement. Stock trading was the highest in the world at the New York Stock Exchange until being passed by NASDAQ in the 1990s. Every major event in American business history has been witnessed at the New York Stock Exchange, including the stock market crash of 1929. Simply put, there is not a part of history in the stock market that does not include the New York Stock Exchange.

Changes For The New York Stock Exchange
With nearly two hundred years of history, there is no doubt that the New York Stock Exchange has seen many changes. Among the events that have defined the stock market news at the New York Stock Exchange are:

  • 1792 - The NYSE acquires its first traded company
  • 1817 - The constitution of the New York Stock and Exchange Board is drafted
  • 1867 - The First Stock Ticker
  • 1907 - Panic of 1907
  • 1914 - World War I causes the longest exchange shutdown: four months, two weeks
  • 1929 - Central quote system established; Black Thursday (October 24) and Black Tuesday (October 29) signal coming of Great Depression
  • 1943 - Trading floor is opened to women
  • 1954 - DJIA surpasses its 1929 peak
  • 1971 - NYSE recognized as Not-for-Profit organization for tax purposes
  • 1977 - Foreign brokers are admitted to NYSE
  • 1979 - New York Futures Exchange established
  • 1987 - Black Monday, October 19
  • 1996 - Real-time ticker introduced
  • 1999 - 2000 - First NYSE global index launched under the ticker NYIID
  • 2001 - September 11, 2001 attacks occur, closing NYSE for 4 sessions
  • 2006 - NYSE and ArcaEx merge, forming the publicly owned, for-profit NYSE Group, Inc.; in turn, NYSE Group merges with Euronext, creating the first trans-Atlantic stock exchange group; DJIA tops 12,000 on October 19

The Future Of The New York Stock Exchange
The New York Stock Exchange has a bright future and continues to grow year after year. With the introduction of stock market online investing, the New York Stock Exchange will continue to grow even without another broker learning how to buy stock. More investors come to Wall Street every year and the New York Stock Exchange continues to handle the additional volume thanks to state-of-the-art stock trading software. While security concerns will always exist, the New York Stock Exchange continues to work to its data safe for those investing in the stock market.

Conclusion
After nearly two hundred years, the New York Stock Exchange continues to be one of the premier stock market trading tools. With all of the positives of the New York Stock Exchange and the efforts that are put into keeping it efficient and secure, it will probably be the home of successful traders for another two hundred years.

Market Direction: Everybody can make money when the markets are moving up. A rising tide raises all boats. But Candlestick analysis provides 'more' advantages when the market is going up. Of course everybody is going to make money in a bullish trend. But the first caveat to that statement is that you are positioned to take advantage of the bullish trend. The markets have had a good positive move since the middle part of August. A strong Morning Star signal allowed candlestick investors to get themselves in bullish positions. That may be obvious in hindsight but keep in mind, for the past month and a half there have been many talking head gurus that have been touting the fact that this market was going lower. You can bet your bottom dollar they were not heavily long in this bullish uptrend. You can also be assured that many people were not in the correct sectors during this last uptrend.

Candlestick analysis produces some very huge benefits. First of all, it allows an investor to know whether to be predominantly long, predominantly short, or have a mixed portfolio. Most investors have a hard time projecting which way the market is going in general. Next, once the trend is analyzed correctly, what would be the next logical analytical step? Which stocks/sectors are going to perform the best during the up trend.

Remember, anybody can make money during a bullish trend. If you are serious about investing correctly, you want to be able to position yourself to take advantage of price moves that are going to be the most advantageous during a price trend. Wouldn't you rather find positions that could produce 10%, 20%, 40%, or greater profits when the Dow moved up 6%? That is the capabilities that can be utilized in candlestick analysis.

The candlestick signals and patterns provide additional credibility for finding not only a price movement that may be moving in the same direction as the markets, but provides the opportunity to make much bigger percent profit because our the effects of a price pattern. Last week we mentioned in the newsletter positions such as DRL producing anywhere from 23% to 36% profits in one day. That was due to the recognition of a Fry Pan Bottom breakout potential. LEND was illustrated as a strong chart pattern that produced over a 50% return in two to three weeks.

When you add these returns to a portfolio where the majority of positions have produced 5%, 7%, 12%, 18% or better returns over the past two weeks, the big-percent position moves enhance the returns all that much more. The Candlestick Forum is an educational website to teach people how to recognize where the high profit potential can be in the markets. You will not see banner headlines about the tremendous returns produced this week or that week. The most flamboyant expression of successful investing will be found simply in explanatory text as this newsletter. The purpose for learning how to use candlestick signals correctly is so you can make profits in your own account. What is usually the first thing we think about when we hear some investment guru tell how they made big profits in such and such a trade last week or last month? The first thing that comes to mind is what did you do the months before that and what are you going to be able to do next month. Learn how to use candlestick signals correctly and you do not have to depend on anybody else.

DRL

SKX

When Mr. Bigalow recommends a stock position, he does it by illustrating all the technical confirmations that may make the signal or the pattern a high probability trade. The purpose for the recommendations is not to be involved in a potentially good trade but to learn what evaluation was utilized to make that a high probability high profit trade. The visual aspects of candlestick analysis make learning how to invest successfully very easy. You can make profits in a bullish market, just like everybody else. But wouldn't you like to be able to participate in the best profit potential during a bullish market? Candlestick signals and patterns make that very feasible.

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Friday, June 1, 2007

Stock Exchange

A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities, as well as, other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

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[edit] History of stock exchanges

In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.

Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.

However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London.

[edit] The role of stock exchanges

Stock exchanges have multiple roles in the economy, this may include the following:[1][2]

[edit] Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

[edit] Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Redistribution of wealth

Stocks exchanges do not exist to redistribute wealth although casual and professional stock investors through stock price increases and dividends get a chance to share in the wealth of profitable businesses.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (e.g. Enron Corporation, MCI WorldCom, Pets.com, Webvan, or Parmalat).

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors, and to enjoy similar rates of return(s).

Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such municipal bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy..

Major stock exchanges

The major stock exchanges in the world include:

See also: Category:Stock exchanges

[edit] Listing requirements

Listing requirements are the set of conditions imposed by a given stock exchange upon companies that want to be listed on that exchange. Such conditions sometimes include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.

[edit] Requirements by stock exchange

Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there, but requirements vary by stock exchange:

  • London Stock Exchange: The main market of the London Stock Exchange has requirements for a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing.
  • NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years ([1]).
  • New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), for example, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years ([2]).
  • Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of Rs.250 Million and minimum public float equivalent to Rs.100 Million([3]).

[edit] Ownership

Stock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, where the members sell their shares in an initial public offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange. Examples are Australian Stock Exchange (1998), Euronext (2000, as of 14 June 2006 in talks to a proposed merger process with the New York Stock Exchange), NASDAQ (2002) and the New York Stock Exchange (2005).

[edit] Other types of exchanges

In the 19th century, exchanges were opened to trade forward contracts on commodities. Exchange traded forward contracts are called futures contracts. These commodity exchanges later started offering future contracts on other products, such as interest rates and shares, as well as options contracts. They are now generally known as futures exchanges.

[edit] The future of stock exchanges in the United States

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The future of stock trading appears to be electronic, as competition is continually growing between the remaining traditional New York Stock Exchange specialist system against the relatively new, all Electronic Communications Networks, or ECNs. ECNs point to their speedy execution of large block trades, while specialist system proponents cite the role of specialists in maintaining orderly markets, especially under extraordinary conditions or for special types of orders.

The ECNs contend that an array of special interests profits at the expense of investors in even the most mundane exchange-directed trades. Machine-based systems, they argue, are much more efficient, because they speed up the execution mechanism and eliminate the need to deal an intermediary.

Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all exchanges) has been slow to respond to technological innovation. Conversion to all-electronic trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs traders."

William Lupien, founder of the Instinet trading system and the OptiMark system, has been quoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fast once you reach the tipping point. We're now at the tipping point."

Congress mandated the establishment of a national market system of multiple exchanges in 1975. Since then, ECNs have been developing rapidly.

One example of improved efficiency of ECNs is the prevention of front running, by which manual Wall Street traders use knowledge of a customer's incoming order to place their own orders so as to benefit from the perceived change to market direction that the introduction of a large order will cause. By executing large trades at lightning speed without manual intervention, ECNs make impossible this illegal practice, for which several NYSE floor brokers were investigated and severely fined in recent years. Under the specialist system, when the market sees a large trade in a name, other buyers are immediately able to look to see how big the trader is in the name, and make inferences about why s/he is selling or buying. All traders who are quick enough are able to use that information to anticipate price movements.

ECNs have changed ordinary stock transaction processing (like brokerage services before them) into a commodity-type business. ECNs could regulate the fairness of initial public offerings (IPOs), oversee Hambrecht's OpenIPO process, or measure the effectiveness of securities research and use transaction fees to subsidize small- and mid-cap research efforts.

Some, however, believe the answer will be some combination of the best of technology and "upstairs trading"— in other words, a hybrid model.

Trading 25,000 shares of Lucent stock (recent quote: $2.80; recent volume: 49,069,700) would be a relatively simple e-commerce transaction; trading 100 shares of Berkshire Hathaway Class A stock (recent quote: $88,710.00; recent volume: 450) may never be. The choice of system should be clear (but always that of the trader), based on the characteristics of the security to be traded.

Even with ECNs forming an important part of a national market system, opportunities presumably remain to profit from the spread between the bid and offer price. That is especially true for investment managers that direct huge trading volume, and own a stake in an ECN or specialist firm. For example, in its individual stock-brokerage accounts, "Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37% of its undesignated market orders through the Boston Stock Exchange, where an affiliate controls a specialist post."

Fidelity says these arrangements are governed by a separate brokerage "order-flow management" team, which seeks to obtain the best possible execution for customers, and that its execution is highly rated.

[edit] The "upstairs market"

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NASDAQ in Times Square, New York City.
NASDAQ in Times Square, New York City.

Recent research by Kumar Venkataraman, finance professor at SMU's Cox School of Business, and Hendrik Bessembinder offers insight and evidence into new possibilities and difficult issues facing stock exchanges. In “Does an electronic stock exchange need an upstairs market?” from the July, 2003 issue of Journal of Financial Economics, the authors find that a large proportion of institutional trading in electronic exchanges is executed away from the centralized book in the informal 'upstairs market', thus presenting new challenges.

Despite the efficiencies of computerized markets, virtually every stock market is accompanied by a parallel "upstairs" market, where larger traders employ the services of brokerage firms to locate counterparties and negotiate trade terms. Upstairs markets are based on relationships. Rather than submitting an electronic order to effortlessly attract counterparties, the upstairs brokers seek out counterparties (from traders known to them who might be interested). They then negotiate transactions that might otherwise be executed at an inordinate cost or delay. An electronic trading system lowers the fixed costs of trading for relatively liquid stocks in block sizes not likely to overwhelm the current market. However, it does not allow for the informal exchange of information (?) that is important for certain types of large trades and for illiquid stocks.

In electronic markets, traders don’t get a sense of who they’re trading with, how much more the other party is trading, etc., and that information can be very important to some traders. Large (institutional) traders therefore seek other trading venues such as the 'upstairs market' to lower the risk of exposing their order positions, to ensure symmetric transfer of information, and to retain some of the give and take of the old open outcry market. Approximately 70% of block-size trade transactions are executed in the upstairs market in Paris.

The Paris Bourse provides an excellent illustration of the use of upstairs intermediation markets, because its electronic limit order market closely resembles the downstairs (electronic) markets envisioned by theorists. The best evidence from the Paris Bourse is that:

  1. Upstairs brokers lower the risk of adverse selection by "certifying" block orders as uninformed (i.e., as not having access to nonpublic information).
  2. Upstairs brokers are able to tap into pools of hidden or unexpressed liquidity (they frequently 'go looking' for buyers or sellers not currently in the market).
  3. Traders strategically choose across the upstairs and downstairs markets to minimize expected execution costs (including slippage, etc.).
  4. Trades are more likely to be routed upstairs if they are large or are in stocks with low overall trading activity.

The second result is the most novel and arguably the most important. The upstairs broker completes transactions by searching for institutional investors who may be interested in the stock, but who have not as yet formally expressed their trading intentions. It is documented that executions costs of transactions completed by the upstairs broker average only 35% of what they would have paid if completed against limit orders in the centralized electronic exchange, suggesting that trading relationship and the informal exchange of information between upstairs brokers and institutional traders helps lower execution costs. One major challenge facing electronic markets is the lack of a comparable mechanism of certification of traders and information exchange.

The Euronext market allows large transactions in some stocks to be executed outside the quotes. Such outside-the-quote transactions are not permitted in United States markets. For eligible stocks in Paris, market participants agree to outside-the-quote execution mainly for more difficult trades and at times when downstairs liquidity is lacking. These likely represent trades that probably could not have been otherwise completed, suggesting that market quality can be enhanced by allowing participants more flexibility to execute blocks at prices outside the quotes. These findings are particularly relevant to U.S. markets because quoted spreads and depths have decreased substantially in the wake of decimalization.

The upstairs market in the Paris Bourse completes two-thirds of block trading volume, compared with 20% on the New York Stock Exchange (NYSE). A likely explanation is that the NYSE floor allows large traders to execute customized strategies through a floor broker, while avoiding the risks of order exposure. If orders submitted to electronic markets do not allow block initiators to limit order exposure and trade strategically, then order flow is likely to migrate to alternative trading venues such as the upstairs market. If you’re a liquidity trader, you don’t want the system to be anonymous. If you’re an informed trader you like anonymity because you can hide in the order flow.

To compete with broker-intermediated markets, the next generation of electronic trading systems needs to include features that better meet the needs of large traders, particularly the lack of anonymity. To allow large investors to manage order exposure in an electronic exchange, a wider range of order types that include state contingent exposure and execution algorithms need to be made available. The NYSE’s recently introduced “Conversion and Parity” (CAP) orders which are intended to be “smart” orders for large lots of stocks that are executed gradually through the day, contingent on market conditions, are a step in this direction.

[edit] The future role of the specialist

The specialist trades in circumstances when others do not or will not, and therefore takes on a risk which warrants compensation. The current debate centers on the model of compensation. The specialist at the Paris Bourse is compensated in cash and with investment banking business. In contrast, the NYSE specialist is compensated in the form of privileged information on order flow. In recent months, several U.S. institutions have alleged that the NYSE trading abuses is an outcome of this compensation structure. The Paris model overcomes this criticism and presents an alternative for the NYSE to consider. Results show, however, that there continues to be a role for the specialist (or, at least, an 'upstairs trader') in electronic markets. Investors value the presence of a specialist because they can get in and out of a stock with greater ease.

References

  1. ^ ROLE OF THE EXCHANGE IN THE ECONOMY, NAIROBI STOCK EXCHANGE, source: Nairobi Stock Exchange website, accessed February 2007
  2. ^ The Role of a Stock Market in a General Equilibrium Model with Technological Uncertainty, Peter A. Diamond, The American Economic Review, Vol. 57, No. 4 (Sep., 1967), pp. 759-776, source: JSTOR website,
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