For a new investor, it is important to know the various kinds of stocks available in the market and the different markets in which they are traded, or the different stock markets.
There are two basic kinds of stocks:
1. Common Stocks
2. Preferred Stocks
A common stock is the “basic stock” of a company that is directly affected by the fluctuation in the profit and loss of the company. These stocks are also issued to the employees of the company. Although, high risk is associated with common stocks, they are also a vehicle for making high profit as there are no fixed dividends attached to them. After the common stocks, the preferred stocks are distributed to the chosen stakeholders. These stocks carry a fixed dividend associated with them that is paid at regular intervals to stakeholders. They can further be classified into A, B, and C categories having different prices, restrictions, and dividend amounts.
Preferred stockholders are paid their dividends much before the common stockholders are paid their profits. If due to some reason a company liquidates, its preferred stockholders get back their money, while common stockholders may not. However, there is less profit associated with preferred stocks.
Stock splits are issued by companies when there is a huge decrease in the demand for its stocks. Here, an investor is able to buy twice the value of stock for the same amount of money. With increased demand, there may be a reverse split, which is just the opposite of a stock split. However, there is no loss of money for the investor for both these kind of transactions.
The actual place where the trading of securities takes place is called a stock exchange. There are again two basic kinds of stock exchanges:
1. Physical Exchange: For example, NYSE and AMEX
2. Virtual/Online Exchange: For example, NASDAQ
The New York Stock Exchange (NYSE) has been operational since 1792. It is located on the Wall Street, and has strict rules for companies to get listed. The NYSE lists big corporations, such as Coca-Cola, Wal-Mart, and General Electric. The NYSE is also known as an “auction market”; this is because investors bid for shares on the floor as in an auction and the share goes to the lowest bidder. It is believed, that the stocks on the NYSE are less volatile and more stable. The maximum listing fee for the exchange is $250,000 and the maximum continual yearly listing fee is $50,000.
The American Stock Exchange (AMEX) is another major physical exchange operating in Manhattan. AMEX’s core business however lies with exchange-traded funds. In 1998, AMEX merged with the National Association of Securities Dealers (operators of NASDAQ) to form “The NASDAQ-Amex Market Group.” The AMEX has liberal policies for listing, as compared to NYSE or NASDAQ. Some companies listed on AMEX are B & G Foods Holding Corp., Otelco Inc., etc.
For NASDAQ, trading is virtual or over the online network. Investors and stock traders deal and interact with each other virtually to buy and sell stocks over the Internet. Thus, a trading floor is non-existent for NASDAQ. NASDAQ lists “tech giants,” such as Microsoft, Cisco, and Oracle. It is also known as a “dealer’s market” as here, trading does not happen through auction but through a dealer who interacts with the buyers and sellers. The maximum listing fee for the exchange is $150,000 and the maximum continual yearly listing fee is $60,000. Thus, the stocks listed here are more “growth-oriented.”