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Business LibreTexts

13.5: Understanding Securities Markets

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  • Learning Objectives

    1. Show how the securities market operates and how it’s regulated.
    2. Understand how market performance is measured.

    So, before long, you’re a publicly traded company. Fortunately, because your degree in finance comes with a better-than-average knowledge of financial markets, you’re familiar with the ways in which investors will evaluate your company. Investors will look at the overall quality of the company and ask some basic questions:

    • How well is it managed?
    • Is it in a growing industry? Is its market share increasing or decreasing?
    • Does it have a good line of products? Is it coming out with innovative products?
    • How is the company doing relative to its competitors?
    • What is its future? What is the future of its industry?

    Investors also analyze the company’s performance over time and ask more-specific questions:

    • Are its sales growing?
    • Is its income going up?
    • Is its stock price rising or falling?
    • Are earnings per share rising?

    They’ll assess the company’s financial strength, asking another series of specific questions:

    • Can it pay its bills on time?
    • Does it have too much debt?
    • Is it managing its productive assets (such as inventory) efficiently?
  • Primary and Secondary Markets and Stock Exchanges

    Security markets serve two functions:

    1. They help companies to raise funds by making the initial sale of their stock to the public.
    2. They provide a place where investors can trade already issued stock.

    When you went through your IPO, shares were issued through a primary market—a market that deals in new financial assets. As we’ve seen, the sale was handled by an investment banking firm, which matched you, as a corporation with stock to sell, with investors who wanted to buy it.

  • Organized Exchanges

    After a certain time elapsed, investors began buying and selling your stock on a secondary market. The proceeds of sales on this market go to the investor who sells the stock, not to your company. The best-known of these markets is the New York Stock Exchange (NYSE)1, where the stocks of the largest, most prestigious corporations in the world are traded. Other exchanges, including the American Stock Exchange (AMEX) and regional exchanges located in places like Chicago and Boston, trade the stock of smaller companies.

  • OTC Markets

    Note that a “market” doesn’t have to be a physical location. In the over-the-counter (OTC) market, securities are traded among dealers over computer networks or by phone rather than on the floor of an organized exchange. Though there are exceptions, stocks traded in the OTC market are generally those of smaller (and often riskier) companies. The best-known OTC electronic-exchange system is the NASDAQ (National Association of Securities Dealers Automated Quotation system). It’s home to almost five thousand corporations, many of them technology companies. Unlike other OTC markets, the NASDAQ lists a variety of companies, ranging from small start-ups to such giants as Google, Microsoft, and Intel.