In the United States, through the intermarket trading system, stocks listed on one exchange can often also be traded on other participating exchanges, including electronic communication networks ECNs , such as Archipelago or Instinet. Many large non-U. S companies choose to list on a U. These companies must maintain a block of shares at a bank in the US, typically a certain percentage of their capital.
On this basis, the holding bank establishes American depositary shares and issues an American depositary receipt ADR for each share a trader acquires. Likewise, many large U. Small companies that do not qualify and cannot meet the listing requirements of the major exchanges may be traded over-the-counter OTC by an off-exchange mechanism in which trading occurs directly between parties.
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Shares of companies in bankruptcy proceedings are usually listed by these quotation services after the stock is delisted from an exchange. There are various methods of buying and financing stocks, the most common being through a stockbroker. Brokerage firms, whether they are a full-service or discount broker, arrange the transfer of stock from a seller to a buyer.
Most trades are actually done through brokers listed with a stock exchange. There are many different brokerage firms from which to choose, such as full service brokers or discount brokers.
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The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a bank or credit union that may have a deal set up with either a full-service or discount broker. There are other ways of buying stock besides through a broker.
One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself.
A direct public offering is an initial public offering in which the stock is purchased directly from the company, usually without the aid of brokers. When it comes to financing a purchase of stocks there are two ways: purchasing stock with money that is currently in the buyer's ownership, or by buying stock on margin. Buying stock on margin means buying stock with money borrowed against the value of stocks in the same account. These stocks, or collateral , guarantee that the buyer can repay the loan ; otherwise, the stockbroker has the right to sell the stock collateral to repay the borrowed money.
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Buying on margin works the same way as borrowing money to buy a car or a house, using a car or house as collateral. Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order short selling ; although a number of reasons may induce an investor to sell at a loss, e.
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As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, full service or discount, handles the transaction. After the transaction has been made, the seller is then entitled to all of the money.
An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis. The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the market, the price of a stock is sensitive to demand. However, there are many factors that influence the demand for a particular stock. The fields of fundamental analysis and technical analysis attempt to understand market conditions that lead to price changes, or even predict future price levels.
A recent study shows that customer satisfaction, as measured by the American Customer Satisfaction Index ACSI , is significantly correlated to the market value of a stock. Stocks can also fluctuate greatly due to pump and dump scams. At any given moment, an equity's price is strictly a result of supply and demand.
The supply, commonly referred to as the float , is the number of shares offered for sale at any one moment. The demand is the number of shares investors wish to buy at exactly that same time.
The price of the stock moves in order to achieve and maintain equilibrium. The product of this instantaneous price and the float at any one time is the market capitalization of the entity offering the equity at that point in time. When prospective buyers outnumber sellers, the price rises. When sellers outnumber buyers, the price falls. Thus, the value of a share of a company at any given moment is determined by all investors voting with their money.
If more investors want a stock and are willing to pay more, the price will go up.
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If more investors are selling a stock and there aren't enough buyers, the price will go down. That does not explain how people decide the maximum price at which they are willing to buy or the minimum at which they are willing to sell. In professional investment circles the efficient market hypothesis EMH continues to be popular, although this theory is widely discredited in academic and professional circles.
Briefly, EMH says that investing is overall weighted by the standard deviation rational; that the price of a stock at any given moment represents a rational evaluation of the known information that might bear on the future value of the company; and that share prices of equities are priced efficiently , which is to say that they represent accurately the expected value of the stock, as best it can be known at a given moment.
In other words, prices are the result of discounting expected future cash flows. The EMH model, if true, has at least two interesting consequences. First, because financial risk is presumed to require at least a small premium on expected value, the return on equity can be expected to be slightly greater than that available from non-equity investments: if not, the same rational calculations would lead equity investors to shift to these safer non-equity investments that could be expected to give the same or better return at lower risk.
Second, because the price of a share at every given moment is an "efficient" reflection of expected value, then—relative to the curve of expected return—prices will tend to follow a random walk , determined by the emergence of information randomly over time. Professional equity investors therefore immerse themselves in the flow of fundamental information, seeking to gain an advantage over their competitors mainly other professional investors by more intelligently interpreting the emerging flow of information news.
The EMH model does not seem to give a complete description of the process of equity price determination. For example, stock markets are more volatile than EMH would imply. In recent years it has come to be accepted that the share markets are not perfectly efficient, perhaps especially in emerging markets or other markets that are not dominated by well-informed professional investors. Another theory of share price determination comes from the field of Behavioral Finance.
According to Behavioral Finance, humans often make irrational decisions—particularly, related to the buying and selling of securities—based upon fears and misperceptions of outcomes. The irrational trading of securities can often create securities prices which vary from rational, fundamental price valuations. For instance, during the technology bubble of the late s which was followed by the dot-com bust of — , technology companies were often bid beyond any rational fundamental value because of what is commonly known as the " greater fool theory ".
The "greater fool theory" holds that, because the predominant method of realizing returns in equity is from the sale to another investor, one should select securities that they believe that someone else will value at a higher level at some point in the future, without regard to the basis for that other party's willingness to pay a higher price. Thus, even a rational investor may bank on others' irrationality.
When companies raise capital by offering stock on more than one exchange, the potential exists for discrepancies in the valuation of shares on different exchanges. A keen investor with access to information about such discrepancies may invest in expectation of their eventual convergence, known as arbitrage trading. Electronic trading has resulted in extensive price transparency efficient-market hypothesis and these discrepancies, if they exist, are short-lived and quickly equilibrated.
From Wikipedia, the free encyclopedia. For "capital stock" in the sense of the fixed input of a production function, see Physical capital. For the goods and materials that a business holds, see Inventory. For other uses, see Stock disambiguation. This article needs additional citations for verification.
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