Chapter 3 : Understanding Stock Market
Topics covered in this snack-sized chapter:
A Stock Market Overview
The stock market is a series of exchanges where the trading of equities (companies' stocks) takes place.
Exchanges, entities that bring together buyers and sellers in an organized manner, are where stocks are listed and traded. Globally there are many well-known finance centers such as New York, London, Tokyo and Germany.
In the United States, stocks are traded on exchanges such as the New York Stock Exchange (NYSE), which is located on Wall Street.
In addition to the NYSE, there is also the NASDAQ exchange.
The NASDAQ originally featured over-the-counter (OTC) securities, but today it lists all types of securities.
Stocks can be listed on either exchange if they meet the listing criteria, but in general technology firms tend to be listed on the NASDAQ.
The Securities and Exchange Commission (SEC) is the regulatory body that is charged with overseeing the stock market.
The SEC is a federal agency that is independent of the political party in power.
The agency states that its "mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
Shortly after the stock market crash of 1929, a regulatory body called the Securities & Exchange Commission (SEC) was born.
Its goal was to restore investor confidence and faith in a financial sector that was notorious for fraudulent activities, easy credit and hazardous investments.
Two significant proposals by the U.S. Congress, the Securities Act of 1933 and the Securities Exchange Act of 1934, led the way to the formation of the SEC and, ultimately, a structured financial industry under government supervision.
The aim of both of these acts was to protect investors from any indiscretions that could arise from:
- Fraudulent and questionable public companies.
- Dishonest and unscrupulous individuals dealing in the securities markets.
The SEC is divided into four main divisions. They work together, but have specific areas in which they mandate and ensure compliance.
These departments are:
The SEC is on your side.
Whether you are a large investment firm or just the average investor, the SEC tries to make sure that all public companies provide accurate information so that investors can make educated decisions.
While large-scale cases of fraud occur from time to time, the SEC, by and large, is there to protect individual investors.
By maintaining accurate records, inspecting company reports and keeping a watchful eye over market activity, the SEC acts as a police force, a lawmaker and sometimes even a court for the securities market.
There are two general types of securities that are most frequently traded:
- Over-the-counter securities.
Over-the-counter securities
Over-the-counter securities are traded directly between parties, usually via a dealer network, and are not listed on any exchange, although these securities may be listed on pink sheets.
OTC securities do not need to comply with SEC reporting requirements, thus finding credible information on these securities can be difficult.
The lack of information makes investing in pink sheet securities similar to investing in private companies - investors need to look closely at the company to ascertain the securities' quality.
Listed securities are those stocks traded on exchanges.
These securities need to meet the reporting regulations of the SEC as well as the requirements of the exchanges on which they are listed.
