DOMESTIC STOCK EXCHANGES (DSEs)

Based in New York City, the New York Stock Exchange (NYSE) is the oldest and largest stock exchange in the U.S.
A multitude of companies list their shares on the NYSE. The NYSE has strict listing requirements that a company must meet prior to trading. For example, 1.1 million shares of a company's stock must already be held by the public, and 400 of the shareholders must own at least 100 shares each. Bigger firms who trade in large volumes are usually the only ones who are able to meet these requirements. The NYSE is considered to be the exchange for well-established companies that have stable stocks (the stocks are not as volatile). As of 2017, the NYSE is open for trading Monday through Friday from 9:30AM to 4:00PM Eastern Standard Time. The American Stock Exchange (AMEX) is another domestic exchange. It is owned by and modeled after the NYSE. If a security is already listed on the NYSE, it cannot be listed on AMEX. In other words, the NYSE and AMEX cannot dually list securities.

REGIONAL STOCK EXCHANGES (RSEs)

Most regional exchanges are modeled after the NYSE, but each one has its own rules and regulations. The main regional exchanges are the Boston, Chicago, Cincinnati, Philadelphia, and Pacific Stock Exchange. Simply put, a regional exchange mainly deals with companies within its geographic region. For example, the Boston Stock Exchange usually deals with companies in the greater Boston area. Additionally, companies that list their shares on regional exchanges are usually small and new to their industry.

If a security is already listed on the NYSE, it can still be listed on a regional exchange. In other words, the NYSE and any of the regional exchanges listed above can dually list securities.

INTERNATIONAL STOCK EXCHANGES (ISEs)

Typically, stock exchanges that are located outside the U.S. are considered to be international exchanges. Foreign companies trade on the major international stock exchanges. Due to the continuous increase in globalization, the activity that occurs among these exchanges can have a huge effect on the U.S. markets. Some of the major international stock exchanges are located in Tokyo, London, Madrid, Toronto, Montreal, and Frankfurt.


THE OVER-THE-COUNTER (OTC) MARKET

Securities that are not listed on an exchange are known as unlisted securities. Instead of being traded on an exchange, these unlisted securities are traded on the over-the-counter (OTC) market. The "OTC market" is actually just a huge network of broker-dealers. In other words, over-the-counter trading just means that unlisted stocks are being traded by and between multiple broker-dealers and their clients. Although OTC trading has fewer rules and is less formal than exchange trading, it is still a very organized process. Buying OTC stock is usually a bigger risk than buying stock from the NYSE. Liquidity is also lower in the OTC market. This means that if an investor is looking to sell some of his OTC shares, he might not be able to cash in as quickly as he would like.

Pink Sheets and the Over-the-Counter Bulletin Board (OTCBB) are the "marketplaces" where unlisted securities are sold. In addition to stocks and bonds, all municipal bonds and U.S. government securities trade on the OTC market.

THE NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION SYSTEM (NASDAQ)

The NASDAQ is an American stock exchange where investors can buy and sell stocks on an automatic computer network. It was created as an alternative to the in-person stock trading style in order to decrease time delays and inefficiency. If a company wants to list its shares on the NASDAQ, it must be certain financial requirements. It must maintain a stock price of at least $1, and the value of outstanding stocks must total at least $1.1 million. There is a NASDAQ Small Caps Market for smaller companies that do not meet these listing requirements. The NASDAQ is well-known for its high-tech stock exchanges. Its stocks are also considered to be more volatile and growth-oriented.

The NASDAQ is essential in connecting buyers and sellers in the OTC market. Although the NYSE has higher market capitalization, the NASDAQ actually has a greater trading volume. Its hours of operation are the same as the NYSE's.

There are a variety of ways the NASDAQ quotes security prices to the public. Each level of service provides a certain amount of information. Looking at these quotes will give an investor an idea of how a stock is performing at any given time.

Level I only provides the inside quotes for any given securities. Since the market fluctuates too rapidly for a firm quote, level I prices are not guaranteed. Although investors can see these quotes when using online stock services, they can also get them from their broker. Since level I quotation services do not provide much information, they are of little use to a serious day trader. They are most adequate for the average investor or stock market observer.

Level II also provides inside quotes like level I does. The level II quotation service also discloses which market makers are trading the stock. In other words, it states who is bidding or asking for the stock, as well as how many shares that person (market maker) is looking to buy or sell. It also provides recent transaction information, such as the time, size, and price of the most recent order for any given securities. Level II quotes are available online, but at a cost. Most day traders use these quotes, as well as investors whose investment strategies require them to follow trading activity.

Level III provides all the information that levels I and II do. It also provides market makers with several abilities. They can enter or change bid and ask quotes for trades that are currently happening. Consequentially, it also allows market makers to directly execute trades. Therefore, level III quotes are the core of the trading system because these quotes are coming from the securities dealers that make up the market! Level III also allows these market makers to send out confirmations of their trades. Only registered NASDAQ members (or any person or entity that is given the abilities of a market maker) have access to this level of service.

KEY PLAYERS IN THE SECURITIES INDUSTRY

A designated market maker (DMM), also known as a specialist, handles trading on the NYSE floor and maintains fair and orderly markets for an assigned set of listed firms. DMMs set up the opening stock bid at the beginning of trading and make sure that the best bid and offer prices are transmitted all over the world until the close of trading. DMMs act as "principals" when they buy and sell securities for their own account. They also act as "matchmakers" by tracking interests in particular stocks and help facilitate trades that otherwise might not have been executed.

Market makers are OTC dealers who buy and sell a minimum number of shares of a specific security at a quoted price. An OTC security may have several market makers representing it (unlike a security that is assigned to a DMM on an exchange). The market maker acts more like a depository and distribution source for securities, absorbing excess stock when demand is low, and providing stock when demand is high. As a result, the market maker bears the burden of risk, but also buys and sells for its own profit. The primary source of their profits is the spread, which is the difference between the bid and the ask price. The bid price is the maximum price a buyer is willing to pay for a security. The ask price is the minimum price that a seller is willing to receive for a security.

A floor broker (fb) is a member of an exchange who is authorized to execute trades on the exchange floor on the behalf of clients. The two types of FBs are commission brokers and two-dollar brokers. Commission brokers work for a particular member firm. Two-dollar brokers are independent brokers who execute orders for firms that do not have their own full-time commission brokers. They also handle business for commission brokers when they are too busy to execute all of their orders.

THE ROLES OF A FIRM

Securities firms register as broker-dealers. A broker-dealer is licensed and can conduct business as both a broker and a dealer. However, they cannot be both the broker and the dealer in the same transaction.

When acting as a broker (agent), the firm buys or sells a security on the client's behalf and charges a commission for the service. The firm acts as a matchmaker and never directly owns the security. Instead, it finds a buyer or seller on the OTC market that matches the needs of clients.

When acting as a dealer (principal), the firm buys or sells a security for itself. Since it is assuming actual ownership of the security, it is taking on more of a risk. The firm might sell the security to a client from its own inventory, or buy it for its own account. The firm's profit is derived from the markup (when it sells a security to a client) or the markdown (when it buys a security from a client).

NEW ISSUE MARKET

New issues are offered in the primary market and sold to the public for the first time as initial public offerings (IPOs). They are usually handled for a corporation by an underwriting syndicate comprised of investment banks and selling groups. An underwriter advises the issuing corporation on the best price to offer shares of the new security to the public. Before doing this, the following factors are taken into consideration:

•prevailing market conditions
•indications of interest from the underwriter's book of business
•prices of similar companies
•the company's general financial health

TYPES OF UNDERWRITING CONTRACTS

Depending on the type of commitment required by the issuing company, an underwriting agreement might be formed.

A firm commitment is the most common type of underwriting contract. The underwriter agrees to buy securities from the issuing corporation and pay the proceeds to the company. Any losses that occur due to unsold shares are pro-rated among the participating underwriting firms in proportion to their participation. Although this is the safest type of contract, it is also the most expensive because the underwriter assumes all the risk.

A best efforts contract allows the firm to act as an agent for the issuing corporation. The underwriter sells as many shares as possible at a predetermined price. Unsold shares are absorbed by the issuer.

In an all-or-none contract, the underwriter agrees to sell the entire contract or cancel the deal if shares remain. Underwriters cannot deceive investors by stating that all the securities have been sold if it is not true.

TRADE AND SETTLEMENT DATES

The trade date for the purchase or sale of a security is the date on which the transaction is executed. The settlement date is the date on which the transaction must be completed, or the date the buyer pays for the securities and the seller delivers them. Regular-way settlement for corporate stocks, bonds, and municipal securities is three days after the trade date (T+3). For treasury securities and options, the settlement is one day after the transaction (T+1). Cash transactions settle on the same day as the trade date.

DIVIDEND DISTRIBUTION DATES

When a stock trades without its next dividend payment, it is said to be trading ex-dividend. Since regular-way settlement occurs three business days after the trade date (T+3), the ex-dividend date will always be two days prior to the stock's record date.

When a board of directors announces a dividend payment, it will specify the date by which an investor must own the stock and be registered on the company's records as a shareholder in order to receive the dividend. This is the record date.

The date the dividend is paid out to the shareholders is known as the payment date.

PRICING

Bond market price can be very different from its par value. The bond may be equal to, less than, or more than its face amount, depending on the demand for it on the bond market. Bonds that are sold for less than their par are said to be purchased at a discount. Bonds that are purchased above the face value are said to be offered at a premium. Bond prices are stated as a percentage of par value. For example, a bond with a price of 73 is selling at a discount equal to 73% of its par value, or $730. A bond with a price of 110 is selling at a premium equal to 110% of its par value, or $1,100. Each increment in price percentage is called a point. When a bond price moves from 83 to 89, it has increased six points.

The market value is the current bid and ask price for a security.

Net Asset Value (NAV) refers to the pricing of a mutual fund. It is equal to the total value of the fund's portfolio minus any liabilities.NAV is calculated daily.

Par value is the stated value of a security. Par value is most often used when referring to bond and preferred stock prices. An investor who purchases a bond receives the par value upon maturity.

YIELD TERMS

The amount stated on the bond's coupon is called the nominal yield. If the coupon is paying 5%, then the bondholder receives 5%.

Current Yield looks at the market price fluctuations of the bond, and represents the amount a bond buyer would receive if he purchased it at a given price. Bond market prices shift up and down on account of interest rate changes and investor interest. If the bond is selling for a discount, the current yield will be greater than the coupon rate. For instance, a 5% bond selling at par has a current yield that is equal to its nominal yield, or 5%. A bond that is selling for less than par (discount), has a current yield that is higher than the nominal yield.

Current Yield = Annual Interest Payment/Market Price

If a bond is currently trading at $1000, then $50/ $1000= 5%

Yield to Maturity measures an investor's total return if the bond is held to its maturity date. It is calculated with the annual interest payments plus the difference between what the investor paid for the bond and the amount of principal received at maturity.

Duration is the measure of a bond's price volatility. It considers both the time to maturity and the difference between the coupon rate and yield to maturity. Duration is always equal to or less than the years to maturity of the bond. The longer the duration of a bond, the more its price will fluctuate in response to interest rate changes. Therefore, duration can be used to calculate the impact of interest rate changes on the price of the bond. A bond with a duration of "six" is likely to decrease 6% for every 100 point-increase in market interest rates. As payment frequency increases, duration decreases.

LONG POSITION

When an investor believes that the price of a stock will rise and expects to profit from selling the stock in the future, he will purchase the stock. When this stock is owned, the investor is said to have a long position in the stock. Having a long position limits risk, as the investor can only lose what he paid for the stock. When the investor eventually sells this long position, it is known as a long sale.

SHORT POSITION

When an investor expects the price of a stock to fall, he will borrow the stock from a broker-dealer to sell in the market. Then, the investor will buy back the stock at a much lower price to replace the borrowed shares. This is known as closing the short position. Investors with a short position have sold a stock and now owe that stock to its purchaser. This position provides a much higher risk because the investor might lose much more than what he originally paid for it. The price of the "shorted" stock could rise to an unlimited degree, causing the short seller to replace the borrowed stock at a price much higher than the initial sale price. For this reason, the short position is said to have unlimited risk. The investor's profit is the difference between the original sale price of the borrowed shares and the value of the stock purchased back at the lower price.

TYPES OF ORDERS

A Market Order is the most common type of orders. They instruct the broker to buy or sell a stock at whatever price is available when the order reaches the exchange floor. A market order will always be executed, but the customer will not know the price at which the stock was bought or sold until the order is complete.

A Limit Order is executed at a specified price or better. A "buy limit" order is executed at the order price or lower, while a "sell limit" order is executed at the specific limit price or higher. A limit order might not be executed if the price never reaches the specified limit price.

A Stop Orders becomes a market order to buy or sell a security once the stock reaches a certain price. This specified price is known as the stop price. Similar to a market order, there is no price guarantee with a stop order. However, the investor order will be executed once the stop is activated.

As the name suggests, a Stop-limit Order is a combination of a stop and a limit order. The stock must reach the stop price to activate the order. Once it is activated, it becomes a limit order and will only be filled at the specific price or higher. A buy stop-limit is always placed above the current price of the stock, while a sell stop-limit is always placed below it.

A Day Order is canceled at the end of the trading day if it has not been executed. It is assumed that every order is a day order unless otherwise indicated.

A Good 'Til Canceled (GTC) Order remains in place until it is executed or canceled by the client.

Market on Open: Is entered to be executed at the opening of the trading session on the opening print. This order can be entered as a market order or as a limit order.

A Market-on-Close Order can be entered at any time of the day up until the last few minutes of trading. It may be entered as a market or limit order and must be executed at the close of the market.

In a Not-Held (NH) Order, the floor broker has discretion over the price and timing of the trade.

A Fill or Kill (FOK) Order must be immediately executed in its entirety (usually within a few seconds) or canceled.

An Immediate or Cancel (IOC) Order is similar to a FOK order because they both must be filled immediately. However, an IOC order does not need to be filled in its entirety. Partial fills are acceptable and the unfilled portions are canceled.

An All-or-None Order is executed in its entirety, but not necessarily immediately.

QUOTATIONS

A quotation refers to two separate numbers. One number represents the highest bid price that is currently available for a security, and the other number represents its lowest ask price.

A Firm Quote is the price at which a broker-dealer or market maker buys or sells at least one trading unit of stocks (100 shares) or bonds (five bonds) at the quoted price. Like the name suggests, the price is not negotiable. "Backing away" refers to a market maker refusing to do business at this quoted price. This is against FINRA's trading rules. All quotes are considered to be firm quotes unless otherwise indicated.

A Subject Quote is a quoted price of a given security that is subject to change. It is used for informational purposes only and is not considered to be an actual offer. The only reason that market makers make these quotes is to determine how much a security is worth (valuation). These quotes also give clients a general feel for the market and how securities actively trade.