How often have you heard people say that investing in stocks and shares is like gambling? The truth is that investing in stocks is gambling in the same way as doing any business is gambling because there is always an element of risk in every business.
What is a stock?
A stock, in simple words, is a share in the ownership of a company. Starting and expanding a company on a large scale needs capital, something which individuals or group of individuals cannot afford. The company, therefore, offers to sell its share to the general public. When a company sells it’s privately held shares to new investors for the first time, it is called an IPO-Initial Public Offering or going public.
For example, when you start a company you can issue five shares to raise capital. So each share would be worth 20% or one fifth of the company’s ownership. Therefore, if an individual holds one share and buys another, he owns 40% or two fifth of the company. It must be understood that in normal course a stock, share or equity mean the same thing.
The idea underlying the ownership of a stock is that the shareholders can make claims to the profits and assets of the company.
The fact, however, remains that every public traded company normally issues millions of shares. Therefore, owning a few shares does not mean that you can visit the company any time and start issuing orders or inspecting the records. A stock holding only gives you certain rights such as voting to elect the board of directors of the company or owing some assets.
Normally the ownership of stock is represented by an attractively designed and important stock certificate, which is actually a piece of paper that represents a share or ownership of the company. With the advancement of technology investors usually do not get those paper certificates like their old time counterparts. Stock ownership is, therefore, recorded electronically.
Transfer of shares
The stock is, moreover, held in street name. Street name means that the stock is held in broker’s name and not in the customer’s name. This allows the ownership to be transferred more easily when a stock is bought or sold. This is a time saving procedure for the investors as they do not have to go down to the broker’s office every time they wish to buy or sell their stock.
How do the stocks trade?
Suppose you want to buy or sell stocks. Would you like to advertise your intention to buy or sell them in the local newspapers? And what if you don’t find buyers or sellers even after advertising? It is precisely to answer all such issues, the stock exchange came into existence.
The exchanges act as intermediaries between the buyers and sellers and facilitate stock trading. Typically, electronic exchanges are more efficient, which is why even the face-to-face exchanges normally have electronic transaction services.
There are two main types of exchanges, physical and virtual.
Physical stock exchanges: As the name itself suggests, these exchanges have a physical presence or in other words, they are located in buildings.
Virtual stock exchanges are electronic exchanges, which are linked through computer networks. The entire process of stock trading takes place electronically or online.
Typical examples of stock exchanges are the NYSE, NASDAQ and AMEX.
NYSE
NYSE or the New York Stock Exchange is an example of a physical stock exchange where trading takes place face to face. Whenever you hear the term “listed exchange”, it refers to the NYSE. Of course computers do assist in the trading process.
NASDAQ
The NASDAQ market is the virtual exchange also known as the OTC-over the counter market. There is no trading floor, no specialist, and no central location. Instead all the trading takes place via a computerized network of dealers.
AMEX
The American Stock Exchange or the AMEX is the third largest stock exchange in the US. Prior to NASDAQ’s emergence, it was the second biggest exchange. Currently the stocks traded at the AMEX are primarily the small cap or the lower market capitalization when compared to larger companies.
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