Stock Exchange
by Ellise Walsh

Despite the fact that more than 50% of Americans now own stock in publicly traded companies (mostly through retirement plans like 401(k)’s, 403(b)'s and mutual funds), most people remain blissfully ignorant about the inner workings of the stock market.

Of course, you don’t have to spend every waking moment studying charts and graphs to make money in the stock market. During the amazing bull market of the 1990’s, it seemed like all you had to do to make money in the stock market was to be there. Of course, no trend lasts forever, and for the past few years, making a good return in the stock market has been much more of a challenge.

There are three major stock exchanges in the United States. These three stock exchanges are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automated Quotation System (NASDAQ). If you’ve seen the pictures of traders frantically running about in seeming chaos, that is the NYSE. The NASDAQ exchange is totally automated, so there are no traders running around.

All three stock exchanges are headquartered in New York City, which remains the financial capital of the United States. When looking at stocks, it is generally not that important to know which exchange they are listed on. Each company’s management decides, prior to taking their company public, which stock exchange they want to be a part of.

The NASDAQ stock exchange is generally known as a technology stock exchange, but there are certainly many non-technological stocks included in the index. The NYSE and AMEX stock exchanges are sometimes looked upon as being old and stodgy, but some of the most well known and technologically forward companies are listed on those stock exchanges.

One thing to watch out for, however, when looking at stock exchanges is the so called NASDAQ Over the Counter (OTC) market. Stocks listed on this stock exchange are generally there because they fail to meet the rigid financial and reporting requirements of the major stock exchanges. It is in this land that that so-called penny stocks reside. I’m sure you’ve seen the spam messages touting this or that penny stock as the next Microsoft. Be aware that anyone trading in these penny stocks is treading in dangerous financial waters. These companies are much more likely to go out of business tomorrow than to become the next financial powerhouse. If a company listed on one of the major exchanges fails to keep its stock price above $1.00 for a significant amount of time, it is often relegated to the OTC stock exchange. It is best to stick to the major three stock exchanges for your stock trades.

There is certainly money to be made in the stock exchange. Buying and holding stocks is an excellent way to build up your personal equity and save for a comfortable retirement. Over the long term, stocks have had a much better rate of return than money markets funds, bonds and other types of financial instruments. If you are a beginning investor, or if you just don’t want to spend your days tracking the stock market, you may want to invest in the stock exchange through an index mutual fund. Mutual funds pool the investments of many different investors and buy an entire index of stocks.

For example, a mutual fund which invests in the Standard and Poors 500 will buy all 500 stocks in that index, in the percentages each stock represents in the index. This allows the individual investor to achieve a level of diversification they would not otherwise be able to achieve with a small investment. Diversification is essential to controlling the risk inherent in the stock market. If you buy the stock of one company and it goes out of business, you’re out of luck. But if you are able to spread your investment among 500 stocks, one stock going out of business will barely make a ripple in your rate of return.

The stock market has historically returned more than other investments because there is more risk inherent in the stock exchange than in the bond market. However, there are excellent methods, like using mutual funds and index funds, that and individual can use to control the risk of the stock market while earning an excellent rate of return.

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