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The Stock Market

Stock market is a generic term for those institutions that facilitate the exchange of stocks between buyers and sellers. Stock markets are a type of secondary market and where the price of a corporation’s stock shares is established. A stock market can be a physical place, but with the growth of electronic transactions, a large fraction of stock market transactions are now “virtual.” There are three basic trading venues utilized in the stock market.

Organized Security eExchanges

Organized security exchanges* are formal organizations with tangible physical locations that conduct auction markets in designated (“listed”) securities.

The two national U.S. The New York Stock Exchange (NYSE) and the American Stock Exchange (ASE) are stock exchanges (AMEX).

There also are regional exchanges— including the Boston Stock Exchange, the Chicago Stock Exchange, the Pacific Exchange (in San Francisco and Los Angeles), and the Philadelphia Stock Exchange.

Over the Counter (OTC) markets

Over the Counter (OTC) markets are markets where products such as stocks, foreign currencies, and other cash items are bought and sold by telephone and computer networks and other electronic rather than on a specific exchange of information.

Perhaps the best-known OTC market is “NASDAQ,” which is managed by the National Association of Securities Dealers (NASD).

Electronic Communications Networks

Electronic Communications Networks, or ECNs, are alternative securities trading systems that bring buyers and sellers together for electronic execution of trades.

ECNs allow institutional and individual investors to buy and sell anonymously and facilitate extended, or after-hours, trading.

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Review Checkpoint

To test your understanding of the content presented.

1. Which of the following are National Exchanges?Choose only one answer below.

a. Chicago Exchange

b. Boston Exchange

c. Pacific Exchange

d. None of the above

Correct. None of these are national exchanges; however, they are very important regional exchanges trading in what otherwise would be thinly traded stocks (illiquid) on national exchanges.

2. The NASDAQ is primarily:Choose only one answer below.

a. A primary market

b. A physical location auction market

c. An over-the-counter market

Correct. The NASDAQ is an electronic market with no physical place of trading, unlike the New York Stock Exchange (NYSE). It is not a primary market— which is composed of a consortium of Investment Banks and other primary buyers of newly issued securities; rather, the NASDAQ is a secondary market where previously issued securities are traded. It is what is called an “over-the-counter market” since it deals in securities that do not meet (or do not wish to meet) the requirements of national exchanges such as the NYSE or American Stock Exchange (AMEX).

d. All of the above

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