Lots of people are invested in the market. Some are invested only through the 401K’s at work or through private accounts with large investment firms. These investments are managed by individuals who are employees of their respective investment firms, and the individual investor rarely monitors the performance of these funds.
If, on the other hand, an individual has decided to “strike” out on his/her own, and become an individual trader in the stock market, it is important to understand how the New York Stock Exchange works. So, here is a very simple explanation that should help you understand an organization that most find too “mysterious.”
Defining the Terms
Here are a few simple definitions.
Public Corporation = Any registered company that offers shares of stock for sale on the stock exchange
Investor = Anyone who buys and sells shares of stock on the stock exchange
Share of Stock = A piece of ownership in a corporation
Stock Market = A “grocery store” of sorts that handles the buying and selling of shares of stock by investors.
How It Works
Companies sell shares of stock because they need money. They could borrow the money but then they would have to pay it back at interest. By selling stock, they give a piece of the company to someone else, and they remove the need to pay anything back. If the company does well, the value of the stock goes up, and the investor makes money. If the company goes broke, there is no personal liability for the individuals who began or who control the company. The person who owns stock simply loses – it’s a gamble every investor takes.
Companies who want to sell stock register on the stock exchange. They decide, initially, how much of their company they want to “sell.” So, let’s say you own a furniture company, and you have decided to “go public,” or sell some of your company on the stock market. Here is what you do:
- You decide how much of the company you want to “sell.” Let’s say it is 40%, and you will hold the other 60%.
- You determine your company’s worth, and you decide on $1,025,000.00. 40% of that is $500,000. So you will sell stock that totals $500,000.
- You now must decide how much each share will sell for, because that will determine how many total shares you will sell. If you want to attract small investors, you might price your shares at $25.00; if you want investors with deeper pockets, you might price your shares at $100. If you set the price at $25.00, for example, then you will be selling 20,000 shares.
- Your stock then goes up for sale on the exchange. This is called an “IPS,” or Initial Public Offering. With luck, you get buyers.
- From this point forward, all sales will occur through the Stock Exchange, and it is basically the simple law of supply and demand. If your company is doing really well, and there is good news published about it, the stock will be in demand. Suppose you just expanded into the Chinese marketplace, and Chinese people are really liking your furniture. Sales are up, and this is reported quarterly to the public. People want to buy your stock, because they think it will continue to go up. The demand for your stock may be high, but the people willing to sell may be low. This brings the price up, so the buyer will have to be willing to spend more than the initial $25 to get shares in your company.
- An investor puts in a bid to buy your stock and a price s/he wants to pay. This bid goes to the stock exchange, where that buyer is matched with a seller who is willing to sell at that price. The trade is then made.
- Now, if you decide to buy a stock, you are allowed to identify a ceiling price – the most you will be willing to pay for it. The members of the stock exchange (it’s all automated now) then match you with a seller who is willing to sell at that price.
- If you want to sell your stock (the price has gone up and you want to take your profit now), you will set a “basement” price – the lowest price for which you will sell it. At the exchange, you will be matched with a buyer who is willing to pay your price, and the deal is done.
Those Numbers You See at the End of Each Trading Day
The N.Y. Stock Exchange publishes numbers at the end of each trading day. (4:00 p.m. Eastern Time). The market has either gone “up” of “down” from the previous day. These numbers represent the average gains or losses of the largest companies on the exchange (think GM, AT&T, etc.), and may or may not affect the stock you own. You will need to check your individual stocks to see how they did that day.
Two Ways to Buy and Sell Stock
As an individual investor, you can decide how you want to buy and sell:
- You can use a stock broker who will do all of your “trading” and charge a fee.
- You can complete trades (buying or selling) yourself, through any number of online trading companies (e.g. E-Trade) and pay a smaller fee. It’s all up to you!
It’s not that Mysterious
You should now have a good basic understanding of how the N.Y Stock Exchange Operates and how you, as an individual investor, fit into this “picture.” The concept is really quite simple. Think of the N.Y. Stock Exchange as a giant clearinghouse, sort of like e-Bay, where people go to buy and sell itme, in this case shares of stock.