How Are Stocks & Bonds Bought & Sold?
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The Marketplace for Stocks and Bonds
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There are several intermediate steps that occur in the placement of stock and bonds with the investing public and institutional investors. In general, the process can be seen as progressive steps that allocate capital for investment from pools of cash and equivalents.
Investors can purchase stocks and bonds in the public or private markets, and while most of this discussion is about the public markets, the same procedures hold true for the private stock process. In the United States, stocks are usually listed on one of the three major exchanges: the New York Stock Exchange, the American Stock Exchange and the NASDAQ. Foreign bourses may have one or more trading exchanges.
To be listed on an exchange, capital requirements, net worth requirements and sales must be demonstrated. These statements require substantial testament by legal and financial experts who have examined the original documents and audits of the business. This creation of trust tempered by legal responsibility induces bankers to invest in the stocks and bonds of a company and invites the public to do so as well. With successful experience, the company may move from the private market to the much larger public market.
The Practical Trading of Stocks and Bonds
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Stocks are generally listed on one of the three major exchanges in the United States (see Section 1). Stocks gain membership on the exchange through meeting regulatory requirements and then issuing an initial public offering for stocks.
Most bonds are traded in the over-the-counter market in much the same way. Regulatory issues vary for municipal and corporate bonds. Bonds are usually not quoted on exchanges. They trade in massive size in over-the-counter markets policed by regulatory officers and members.
Both online and off-line brokers enter their orders the same way. Orders are routed through electronic bid-and-asked profiles of every stock. Often, large orders big enough to disrupt the market are entered. Specialists, or market makers who trade stock between the bid-and-asked price, are called in to contact major institutions that may be interested in accumulating size positions at or near the market or even to buy the position as a speculation. The NASDAQ is a notable exception to the practice.
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How the Investor Decides to Sell Cash and Buy Stock
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The shaping of opinion on particular stocks and sectors is the work of the brokerage firm and the broker. Brokers use the company opinion of technical and fundamental factors that are shaping the market's industries and sectors to find trading opportunities in their customer portfolios.
Company analysts are responsible for studying the economic landscape for earning projections, interest rate projections and credit movements. They interpret and make conclusions about business conditions. Hard analysis of an industry becomes a hard analysis of a particular company's earnings potential. It is this data that the broker conveys to his or her clients in the hope of creating a sale.
Today, most brokers are urged by management to move their customers into brokerage-run mutual funds where the same stock analysts directly choose the investments. The broker position is to accumulate and manage assets, not to make investment decisions. Today's broker is much more a salesperson than a market-savvy trader. It is still up to the investor to make the final decision. For more and more investors, the decision is to investigate stocks and trends on their own and make stock decisions through a low-cost online broker.
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