With recent media hits like The Wolf of Wall Street and the news coverage of how people are using Reddit to inflate or crash certain stocks, there has never been a better time to get clued up on how the stock market works. Interested to learn about IPOs and auction exchanges? Keep reading as the following are some key information points every beginner should know.
What is a Stock Exchange?
A stock exchange is a marketplace where people can trade shares of pubic listed companies. Much like a traditional auction, it is the meeting place of the stock buyers and sellers. There are a few different types, for example there are Auction Exchanges, like the New York Stock Exchange, and we’re going to go into these in a little more detail below.
Over-the-Counter (OTC)
These are companies that have either been delisted as a result of their stock price falling too much or are smaller startup companies. Because of the fact that they have fewer restrictions by having less regulatory oversight, people are often scared to make these kinds of trades. But penny stocks are less open to manipulation than bigger value stocks as a result. Some really big companies actually prefer to trade on there, rather than have to go through the oversight of a bigger exchange.
IPO
An initial public offering or IPO is where a company goes to a primary market and sells shares at their base worth to those shareholders. After being bought and purchased, they are then sold onto a secondary market using a stock exchange. The specific exchange dealing with that stock measures the flow of orders for that stock and the price is dictated by how much demand there is for the stock and how many are available.
Auction Exchanges
An auction exchange is where buyers and sellers put in bids simultaneously. The current stock price is dictated by the highest price someone is willing to buy and the lowest price a seller is prepared to accept. The system is being phased out by technology, as it used to be dependent on bodies being on the trading room floor to communicate their prices. The New York Stock Exchange is the world’s largest auction exchange and is owned by the Intercontinental Exchange, but the reason that the specialists on the floor are being phased out is because computers can execute faster trades. Trading on that exchange is a big deal because the companies have to meet listing requirements and investors are afforded all sorts of protection as a result.
Electronic Exchanges
These work similarly to Auction Exchanges but everything is conducted digitally, meaning that these exchanges can handle billions of dollars’ worth of transactions in a day. The Nasdaq is one of the largest and dealers have an inventory of stock that they can buy and sell. Similar to the New York Stock Exchange, there are many protections afforded to investors, such as if a stock cannot be maintained above $4, it can be delisted to the over-the-counter market.
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