 Personal Finance PowerPoint Presentation Stock Exchanges Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia. Get in to know the stock exchanges which you can find online. Take a look at the references, resources, continue your research from there. This is by David R. Harper, updated April 10th, 2022. In prior presentations, we've been looking at investment goals, investment tools, investment strategies. When we think about individual investments, we often break them out into large categories of fixed income, such as bonds and then stocks, which are basically equity interests. We're mainly focusing in here on the stocks, the equity interests, remembering that when we purchase stock or invest in tools that purchased in stocks, like mutual funds and ETFs, the stocks represent an ownership interest in essence of the company, the capacity for us possibly to be voting for things such as the board of directors. And usually we're going to be buying those stocks on an exchange. So then we have to get an idea of what is an exchange. Remember that corporations could be corporations that are not publicly traded, that are not on exchanges, but if they want to generate more capital in order possibly to grow, the exchanges are often beneficial because they facilitate a more easy trade for individuals to be investing, making it easier basically to generate capital. So what are stock exchanges then? A stock exchange does not own shares. When we're thinking about the stock exchange and your buying shares on the exchange, it's not like you're buying from the exchange. The exchange is helping to facilitate the trade that is being made. Instead it acts as a market where stock buyers connect with stock sellers. So it's putting the buyers and sellers together. We're getting more and more accustomed to this kind of concept because we work with basically platforms that are doing the same kind of thing. The platform is connecting the two people together. It's kind of like the Silk Road that connects the traders together and that usually is going to be a big benefit for both people involved including the corporation who gets to generate capital and investors who now have the capacity to get access to these kinds of investments in a way that hopefully is transparent and they can trust. So stocks can be traded on several exchanges such as the New York Stock Exchange, the NYSE or the NASDAQ. Although most stocks are traded through a broker, it is important to understand the relationship between exchanges and the companies that trade. Also, there are various requirements for different exchanges designed to protect investors. So we always have this kind of trade-off between the requirements of the exchanges and the cost of those. So some of those requirements, for example, might be that you have to standardize your financial statements. You have to have them in accordance to some standard. You have to have possibly a third-party audit. All those things make it so that investors can trust more when they buy stocks on the stock market. However, they cost a lot to do that as well. So you've got to basically be balancing these two things out like anything else. So how stock exchanges work? A stock exchange is where different financial instruments are traded, including equities, commodities and bonds. Exchanges bring corporations and governments together with investors. Exchanges help provide liquidity in the market, meaning there are enough buyers and sellers so that trades can be processed efficiently without delays. So clearly as they're processing the trades here, hopefully they're getting better and better at facilitating the trades without the delays. Exchanges also ensure that trading occurs in an ordinary and fair manner, so important financial information can be transmitted to investors of financial and financial professionals. That's one of the key components that we have here because before you have some of the regulations on some of these kind of exchanges, then you have these kind of scam situations. So a scam is different from a business because with a scam it usually involves an unequal sharing of information. So one party in the trade has more information than the other and usually it's a short-term kind of trade that can't stand up basically over time that the scam will fall apart if all the information becomes apparent, obviously. So stocks first become available on an exchange after a company conducts its initial public offering, otherwise known as the IPO. So if a company has incorporated, they're still a corporation, but they're not on the exchange yet, then they might want to start that, you know, if they go onto the exchange then they might be able to generate capital and they usually do that first off with that initial public offer in the IPO. A company sells shares to an initial set of public shareholders in an IPO known as the primary market. After the IPO floats shares into the hands of public shareholders, these shares can be sold and purchased on an exchange or the secondary market. So when you're thinking about, we've talked about the primary and secondary markets in the past, usually when you're buying the stock, you are not buying it from the company unless it was like offered by the company possibly through an IPO. Usually you're buying it from other investors and one of the genius behind stocks themselves is they broke the equity interest. They broke the ownership interests in the corporation into these standard units and that makes it so that we can more easily value those units by seeing how much those units are being traded for making trade on secondary markets where most of the trading happens possible. The exchange tracks the flow of orders for each stock and it's the flow of supply and demand that establishes a stock's price. That's how I like stock prices to happen. Supply and demand, that's how it happens. Depending on the type of brokerage account, you may be able to view this flow of price action. So for example, if a stock's bid price is $40, this means an investor is telling the exchange that they are willing to buy the stock for $40. At that same time, you may see an asking price for $41, meaning somebody else is willing to sell the stock for $41. The difference between the two is the bid asks spread, auction exchanges. Auction exchanges are the auction market or the auction market is a place where buyers and sellers put in competitive bids and offers simultaneously. So in an auction exchange, the current stock price is the highest priced a buyer is willing to spend on a security while the lowest price is what the seller will accept. Traders are then matched and when paired together, the order is executed. The auction market is also referred to as the open outcry system. Brokers and traders communicate physically and verbally on the trading floor or pit to buy and sell security. So you've probably all seen some images of people trading on the trading floor. It looks quite chaotic, but everything pulls together that way. So although this system is slowly being phased out by electronic systems, so obviously the idea that everybody's yelling on the trading floor might you would think that at some point as we get the systems and networks working more and more that might be the way that things are going to be going more often in the future. Some exchanges still use these auction systems including the New York Stock Exchange, the NYSE. The NYSE closing auction is the last event of the trading day when the closing price for each stock is determined by bringing all buyers and sellers together to establish a price for all those involved. New York Stock Exchange, the NYSE, the New York Stock Exchange is the world's largest equities exchange. The parent company of the New York Stock Exchange is Intercontinental Exchange as ICE as a result of the merger with the European exchange Aranext in 2007. Although some of its functions have been transferred to electronic trading platforms, it remains one of the world's leading auction markets, meaning specialists called designated market makers are physically present on the trading floor. Each specialist specializes in a particular stock, buying and selling the stock in the auction. These professionals are under competitive threat by electronic only exchanges that claim to be more efficient. So again, you got these people on the floor versus the electronic systems and you think there'd be some pros and cons to them. You would think possibly the electronic systems might win out over time. That is, they execute faster trades and exhibit smaller bid ask spreads by eliminating human intermediaries. Companies listed on the NYSE have great credibility because they have to meet initial listing requirements and comply with annual maintenance requirements. To keep trading on the exchange, companies must keep their price above $4 per share. So note the exchanges themselves have kind of these regulatory components to them. You also have the SEC, a government entity that kind of looks over this stuff as well. But note that like in a professional setting, like if you're like a CPA or a lawyer or something like that, the profession itself has its own need or its own self-interest to basically be trustworthy and whatnot. So the exchange itself in other words has in its own interest to maintain rules so that they increase the level of transparency for the companies trading on the exchanges because it's that trust, it's that transparency. It's people investing and being willing to put their capital in companies because they trust that they're putting something in something that has value that draws the capital to these exchanges in large degree. So investors who trade on the NYSE benefit from a set of minimum protections among several of the requirements that the NYSE has enacted. The following are especially significant. So we got the equity incentive plans must receive shareholder approval. A majority of the board of directors members must be independent. The compensation committee must be entirely comprised of independent directors and the audit committee must include at least one person who possesses accounting or related financial management expertise. So electronic exchanges. So now we're going to the electronics exchanges here. Many exchanges now allow trading electronically. There are no traders and no physical trading activity. So you're not really imagine the floor and people putting out the bid prices and so on on the floor to set the price. Instead trading takes place on electronic platform and doesn't require a centralized location where buyers and sellers can meet. So again there's pros and cons to this obviously when you think about trading that needs to be taking place in a centralized area that was really important before we had the capacity to network from like a network and a computer system. But it has pros and cons because obviously that then makes that particular area have a whole lot of power and influence right in that particular area. And so you would think that if you could do it on a network thing you might be able to decentralize the actual location of the power at least to some degrees and so on although power will still coalesce wherever it tends to coalesce. It won't be evenly spread but in any case there's pros and cons to it. So these exchanges are considered more efficient and much faster than traditional exchanges and carry out billions of dollars in trades each day. The NASDAQ is one of the world's leading electronic exchanges. The NASDAQ is sometimes called screen based because buyers and sellers are only connected by computers over a telecommunications network. Market makers also known as dealers carry their own inventory of stock. They stand ready to buy and sell stocks on the NASDAQ and are required to post their bid and ask prices. The exchange has listed the governance requirements similar to the NYSE New York Stock Exchange. For example, a stock must maintain a $4 minimum price. If a company does not maintain these requirements it can be delisted to an over-the-counter market. So if they're going to be kicked off the exchange basically that wouldn't be good because you wouldn't have the access to the capital as readily you would think if you were on the over-the-counter market which doesn't have the regulatory requirements of the exchange that are there in part to add transparency to get trust to get more investment. So for example, on the New York Stock Exchange if a security price closed below $1 for 30 consecutive trading days that exchange would initiate the delisting process. Electronic communication networks, the ECNs, electronic communication networks, the ECNs are part of an exchange class called alternative trading systems, ATSs. ECNs connect buyers and sellers directly because they allow a direct connection between the two. ECNs bypass market makers. So cutting out once again the middle man here possibly in that kind of system. So this is becoming more and more possible possibly with the technology increases. So think of them as an alternative means to trade stock listed on the NASDAQ and increasingly other exchanges such as the NYSE or foreign exchanges. There are several innovative and entrepreneurial ECNs that are generally good for customers because they pose a competitive threat to traditional exchanges and therefore push down transaction costs. Although some ECNs allow retail investors to trade, ECNs are mostly used by institutional investors which are firms that invest large sums of other investors such as pension fund managers. So examples of ECNs include NASDAQ, interbank, network, electronic transfer, the INET, and ARCA options which are overseen by the NYSE, the New York Stock Exchange. So over-the-counter OTC. So now we're talking about the OTC which has the less regulation. Typically the term over-the-counter OTC refers to markets other than the organized exchanges described above OTC over-the-counter markets generally list small companies many of which have fallen off the OTC market because they were delisted. Fallen off to the OTC market meaning they were on the exchanges and possibly got delisted and therefore now on the over-the-counter. So two of the major OTC markets include over-the-counter bulletin board that's the OTC BB, the over-the-counter bulletin board. The OTC BB was an electronic communication of market makers. So companies that fall off the NASDAQ often ended up here. Once on the OTC double B there were no quantitative minimums or no annual sales or assets required to list. The OTC bulletin board was closed in November 2021. Then you got the pink sheets. The second OTC market is referred to as the pink sheets a listing service that doesn't require companies to register with the Securities and Exchange Commission. So that's a government entity that is often involved within the regularization process. Again if you're talking about smaller companies they're going to be subject to possibly less regulatory scrutiny because they're smaller and they're not on the exchanges and possibly not generating the same kind of investments from say investors as the large companies traded on the exchanges. The idea being that a company can do what the company wants, generally if they're not on the exchanges and they're private and so on, but if they're asking of course for money from the public then the idea would be well we want to increase more transparency in that instance so the public can trust in the system and be able to do comparing and contrasting more readily without having to actually physically go to the company and do that kind of rigorous analysis. So liquidity is often minimal and these companies are not required to send quarterly 10Qs. We got the OTC risks. Some individual investors are wary of OTC stocks because of the extra risks involved. I would say most investors are going to be more wary there because obviously there are less regulations involved. So on the other hand some strong companies trade on the OTC so obviously you can find value there as well. So in fact several large companies have deliberately switched to OTC markets to avoid the administrative burden and costly fees that a company regulatory oversight laws such as the Sarbanes-Oxley Act. So this is one of the big acts that came up that was designed to increase the confidence in the markets after a bunch of scandals happened but again we've always got this question and this is a standard kind of regulatory question and that being the regulations if they're really efficient and designed to increase transparency that should be a benefit to people and that should draw in more money to the markets over time but if they overstep their bounds and they have regulations that aren't efficient aren't achieving their goal and they're highly costly then they're going to end up having kind of like from an economic term like a black market or people are going to try to avoid the regulations so they might say hey at some point you know if the costs get too high then people might go to the OTC and say hey you know it is what it is you know you gotta trust in what I'm doing here because I can't pay the regulatory burden so you gotta find wherever that balancing place is. You should also be careful when investing in the OTC if you do not have experience with penny stocks as these primary trade over the counter. So other exchanges, there are many other exchanges located throughout the world including exchanges that trade stocks and bonds as well as those that exchange digital currencies. Asia, the TSE has more than 3,800 listed companies with a combined market capitalization of more than 5.6 trillion. The Shanghai stock market, the SSE is the largest in the mainland China. Many investors are traded on the exchange including stocks, bonds and mutual funds. The Shenzhen stock exchange, the SZSE is the second largest stock exchange operated independently in China. Europe, Euronext is Europe's largest stock exchange and although it has undergone multiple mergers it has initially formed by the mergers of the Amsterdam, Paris and Brazil's stock exchanges. The London stock exchange, LSE is located in the United Kingdom and is the second largest exchange in Europe. The most popular index within the LSE is the Financial Time Stock Exchange, the FTSE 100 shares index. The FTSE contains the top 100 well-established publicly traded companies or blue chip stocks, digital exchanges. Coinbase is the leading cryptocurrency exchange in the United States. Coinbase has an advanced trading platform that facilitates cryptocurrency trades for retail investors and custodial accounts for institutions. Although Bitcoin is the most popular cryptocurrency, others are traded via Coinbase such as Ethereum and Litecoin. Coinbase is licensed as a cryptocurrency exchange in 42 United States. Binance is the leading global exchange for cryptocurrencies with an average trading volume of 2 billion per day and the past Binance accounts were able to be funded with US dollars, but that changed and you can make deposits via Swift Transfer. Then we've got Kraken is a San Francisco based cryptocurrency exchange where investors can buy or sell cryptocurrencies using various fiat currencies including US dollars, Euros, Canadian dollars and the Japanese yen. More than a dozen virtual currencies can be traded via Kraken exchange including Bitcoin, Ethereum, EOS and Monero. As in the case, most crypto exchanges investors need to establish and fund their digital wallet which links to the trading account. What is a simple definition of stock exchanges? A stock exchange is a market that brings together buyers and sellers to facilitate investments in stocks. So what are the three major stock exchanges in the United States? The New York Stock Exchange, NYSE is the largest stock exchange in the United States and the world by market capitalization. The NASDAQ is the second largest stock exchange in the United States while the American Stock Exchange which is known as the NYSE AmEx equities after the acquisition by NYSE UranX in 2008 is the third largest in the United States. What is the difference between stock exchange and stock market? The stock exchange is a marketplace or the infrastructure that facilitates equity trading. On the other hand, stock market is an umbrella term, a broader term representing all of the stocks that trade in a particular region or country. A stock market is often represented as an index or grouping of various stocks such as the S&P 500. What is the purpose of a stock exchange? A stock exchange brings companies and investors together. A stock exchange helps companies raise capital or money by issuing equity shares to be sold to investors. The companies invest those funds back into their business and investors ideally earn a profit from their investment in those companies. What's the bottom line then? Every stock must list on an exchange where buyers and sellers meet. The two big United States exchanges are the NYSE New York Stock Exchange and the NASDAQ companies listed on either of these exchanges must meet various minimum requirements and baseline rules concerning the independence of their boards. But these are by no means the only legitimate exchanges. Electronic communication networks are relatively new but they are sure to grab a bigger slice of the transaction pie in the future. Finally, the OTC over the counter market is a fine place to experience investors with an itch to speculate and know how to conduct a little extra due diligence.