Happy #FinanceFriday ! I hope you have been using the information given in this series to help you prepare for a healthier financial future. This week, we’ll go more in-depth with securities markets.
In order for a company to securitize their business, they have to sell claims against their business, e.i. sell shares of stock. Securitization allows companies to sell parts of their company to gain funding rather than to sell the whole company. There are three types of securitization:
- Debt Claims (bonds)
- Equity Claims (stocks)
- Hybrid (mix of debt and equity like a convertible bond)
A security/investment can be public or private. A public security is traded on public exchanges where anyone can buy or sell these securities. Private securities are only sold directly from the private company and can not be bought on public stock market exchanges.
So, how can you buy a security? You can sign up and register with a brokerage firm and use a broker (also known as a Registered Representative) to handle your buy and sell orders. A Specialist sells a particular type of security. However, when using a broker or a specialist, it is essential for you to know what you want to invest in and the mechanics of investing. There is a great book titled “The Millionaire Next Door”, which explains that the richest people in America don’t always make millions per year, but are active investors who, even if they use a broker, are well aware of what securities they want to invest in and why.
There are 2 types of brokers (the word “broker” can be used to describe an individual registered representative broker or an entire brokerage firm).
- Full Service Brokerage Firms: These firms are more expensive, but you get more for the price you pay. Although these brokerage firms have higher transaction/trading prices, they also offer investing advice.
- Discount Brokerage Firms: These firms offer cheaper transaction prices, but they do NOT offer investing advice (your investment decisions are solely your own). I currently use a discount brokerage firm because I do not have the income to pay for a full service firm and I personally do not feel like I invest enough to benefit from using a full service brokerage firm. If you’re like me, then hopefully you can use what you learn with my #FinanceFriday articles and make wise investment decisions using a discount brokerage firm.
Market Makers are specialist in one particular stock and are the middlemen between a buyer and seller of securities. Market Makers buy/bid stocks at a wholesale price the sell/ask stocks at a retail price that is more expensive than wholesale. This mark-up in price is known as a spread, difference between the bid and the ask prices. Market Makers do NOT set the price in which they can sell or mark-up their stocks, supply and demand for that particular stock establishes the price. When a stock is in high demand, the price of that stock will increase. When a stock is not favorable, the price of the stock will decrease. There three ways Market Makers can make money:
- Spread- the difference between the bid and ask prices
- Dividends and interest while holding a security
- Capital gain on the share price (something that could happen to a company that will cause the price of the share to change, e.i. recent news that a company has increased sells of their products could increase the value/price of a share)
There are 4 main securities markets (organized exchanges). Set criteria and application processes determine on which exchange a stock is listed. Please note: you can buy securities listed on various exchanges using one brokerage.
- NYSE (New York Stock Exchange)- a physical place in New York. The largest exchange in the world.
- AMEX (American Stock Exchange)- a physical place in New York
- OTC (Over the Counter)- This is usually for small start ups. Securities are normally traded via a specialized dealer and not on a centralized exchange like the NYSE)
- NASDAQ – not a physical place; all done electronically. The second largest exchange in the world. Many tech stocks and start-ups are listed here then may move up to the NYSE. However, with the popularity and ease of using technology, more companies want their stocks listed in the NASDAQ.
It is also good to mention that there are markets that are only for institutional investors such as mutual funds or retirement plans for employees. The third market is for large transactions known as block trades that include 10,000 shares or more. The fourth market is also for institutional investors, but go through a computer system and not a broker. Buying on these markets come with advantages that unfortunately are not available to small individual investors, such as lower commissions (the price you pay your broker for each transaction) and quicker execution on orders (which can be very beneficial due to the prices of securities changing rapidly on the market throughout the trading day). So, if you have a company and you want to offer retirement plans for your employees, you can buy securities using the third and fourth market.
Please, do NOT hesitate to contact me if you have any questions (Twitter, Facebook, Email: NsideMyBox@gmail.com, or the comments below!) See you next week for part 2 of Securities Markets. Happy Investing!