The Stock Market

As noted earlier, secondary markets are those in which outstanding previously issued securities are traded. By far the most active secondary market, and the most important one to financial manages, is the stock market. Here the prices of firm’s stocks are established. Since the primary goal of financial management is to maximize the firm’s stock price, a knowledge of the stock market is important to anyone involved in managing a business.

The Stock Exchanges

There are two basic types of stock markets: (1) organized exchanges, which include the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and several regional exchanges, and (20 the less formal over-the-counter market. since the organized exchanges have actual physical market locations and are easier to describe and understand, we consider them first.

The organized security exchanges are tangible physical entities. Each of the larger ones occupies its own building, has a limited number of members, and has an elected governing body its board of governors. Members are said to have “seats” on the exchange although everybody stands up. These seats which are bought and sold, give the holder the right to trade on the exchange. There are more than 1,300 seats on the New York Stock Exchange, and recently NYSE seats were selling for about $1.5 million.

Most of the larger Investment Banking houses operate brokerage departments, and they own seats on the exchanges and designate one or more of their officers as members. The exchanges are open on all normal working days, with the members meeting in a large room equipped with telephones and other electronic equipment that enable each member to communicate with his or her firm’s offices throughout the country.

Like other markets, security exchanges facilitate communication between buyers and sellers. For example, Merrill Lynch (the largest brokerage firm) might received an order in its Atlanta office from a customer who wants to buy 100 shares of AT&T stock. Simultaneously, Dean Witter’s Denver office might receive an order from a customer wishing to sell 100 shares of AT&T. Each broker communicates by wire with the firm’s representative on the NYSE. Other brokers through out the country are also communicating with their own exchange members. The exchange members with sell orders offer the shares for sale, and they are bid for by the members with buy orders. Thus, the exchanges operate as auction markets².