What are Stocks, Commodities
and Markets?
Source: U.S. Department of State

The Stock Exchanges

There are thousands of stocks, but shares of the largest, best-known, and most actively traded corporations generally are listed on the New York Stock Exchange (NYSE). The exchange dates its origin back to 1792, when a group of stockbrokers gathered under a buttonwood tree on Wall Street in New York City to make some rules to govern stock buying and selling. By the late 1990s, the NYSE listed some 3,600 different stocks. The exchange has 1,366 members, or "seats," which are bought by brokerage houses at hefty prices and are used for buying and selling stocks for the public. Information travels electronically between brokerage offices and the exchange, which requires 200 miles (320 kilometers) of fiber-optic cable and 8,000 phone connections to handle quotes and orders.

How are stocks traded? Suppose a schoolteacher in California wants to take an ocean cruise. To finance the trip, she decides to sell 100 shares of stock she owns in General Motors Corporation. So she calls her broker and directs him to sell the shares at the best price he can get. At the same time, an engineer in Florida decides to use some of his savings to buy 100 GM shares, so he calls his broker and places a "buy" order for 100 shares at the market price. Both brokers wire their orders to the NYSE, where their representatives negotiate the transaction. All this can occur in less than a minute. In the end, the schoolteacher gets her cash and the engineer gets his stock, and both pay their brokers a commission. The transaction, like all others handled on the exchange, is carried out in public, and the results are sent electronically to every brokerage office in the nation.

Stock exchange "specialists" play a crucial role in the process, helping to keep an orderly market by deftly matching buy and sell orders. If necessary, specialists buy or sell stock themselves when there is a paucity of either buyers or sellers.

The smaller American Stock Exchange, which lists numerous energy industry-related stocks, operates in much the same way and is located in the same Wall Street area as the New York exchange. Other large U.S. cities host smaller, regional stock exchanges.

The largest number of different stocks and bonds traded are traded on the National Association of Securities Dealers Automated Quotation system, or Nasdaq. This so-called over-the-counter exchange, which handles trading in about 5,240 stocks, is not located in any one place; rather, it is an electronic communications network of stock and bond dealers. The National Association of Securities Dealers, which oversees the over-the-counter market, has the power to expel companies or dealers that it determines are dishonest or insolvent. Because many of the stocks traded in this market are from smaller and less stable companies, the Nasdaq is considered a riskier market than either of the major stock exchanges. But it offers many opportunities for investors. By the 1990s, many of the fastest growing high-technology stocks were traded on the Nasdaq.