Essay on "New York Stock Exchange Identify"

Essay 8 pages (2852 words) Sources: 6 Style: Harvard

[EXCERPT] . . . .

New York Stock Exchange

Identify the major purposes of a stock exchange.

As implied by the name "stock exchange" the major purposes of a stock exchange include the buying and selling of stocks, bonds, and other securities. According to Investorwords, stock is defined as:

An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock. also called equity or equity securities or corporate stock. (2009, Stock).

Bonds are defined as:

A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer, unlike in the case of equities. On the hand, a bond holder has a greater claim on an issuer's income than a shareholder in the case of financial distress (this is true for all creditors). Bonds are often divided into different categories based on tax status, credit quality, issuer type, maturity and secured/unsecured (and there are several other ways to classify bonds as well). U.S. Treasury bonds are generally considered the safest unsecured bonds, since the possibility of the Treasury defaulting on payments is almost zero. The yield from a bond is made up of three components: coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains). A bond might be sold at above or below par (the amount paid out at maturity), but the market price will approach par value as the bond approaches maturity. A riskier bond has to provide a higher payout to compensate for that additional risk. Some bonds are tax-exempt, and these are typically issued by municipal, county or state governments, whose interest payments are not subject to federal income tax, and sometimes also state or local income tax. (Investorwords, 2009, Bond).

Security is defined as:

An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity. The official definition, from the Securities Exchange Act of 1934, is: "Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. (Investorwords, 2009, Security).

2. Give a brief history on your chosen exchange explaining when and how it was formed.

It is difficult to identify the exact moment that the New York Stock Exchange (NYSE) was formed, because it has a history that is almost as long as the history of European settlers in America. The simplistic answer is that the NYSE was formed in 1792 when 24 New York City stockbrokers and merchants signed the Buttonwood Agreement, whereby they agreed to trade securities on a commission basis. (NYSE Euronext, 2009, Timeline). The securities market grew rapidly after the war of 1812, which resulted in stricter rules for stock trade, which were instituted in 1817. (NYSE Euronext, 2009, Timeline). In 1863, the New York Stock & Exchange Board became the New York Stock Exchange, and in 1865 the NYSE moved into its permanent home on 10-12 Broad Street, and later to 18 Broad Street. (NYSE Euronext, 2009, Timeline). In 1866, the NYSE began supervising and controlling listing policies. (NYSE Euronext, 2009, Timeline). In 1867, the stock ticker was invented, which allowed investors to see current prices. (NYSE Euronext, 2009, Timeline). In 1869, the NYSE consolidated with the Open Board of Brokers. (NYSE Euronext, 2009, Timeline). In 1878, the NYSE got its first telephone on the floor. (NYSE Euronext, 2009, Timeline). In 1896, the Dow Jones Industrial Average (DJIA) was first published by the Wall Street Journal. (NYSE Euronext, 2009, Timeline). In 1918, Wall Street became the world financial leader. (NYSE Euronext, 2009, Timeline). In 1971, the NYSE was incorporated as a non-profit. (NYSE Euronext, 2009, Timeline). In 1996, the NYSE launched real-time tickers on CNBC and CNN-FN. (NYSE Euronext, 2009 Timeline).

3. Identify and explain three (3) securities that can be traded by individual investors on your chosen exchange.

The NYSE has approximately 8,500 different securities that can be traded by investors. Three companies who trade their stocks on the NYSE include Heinz, Target, and Home Depot. H.J. Heinz Company trades its stock under HNZ and HNZ PR on the NYSE. Heinz offers common stock under HNZ. The stock pays dividends and has a history of eight stock splits. (H.J. Heinz Co., 2009). Target trades its common stocks under TGT on the NYSE. Target's initial public offering was in 1967, its stock has split six times since the IPO, and the stock pays a dividend. (Target, 2009). Home Depot trades its common stock under HD on the NYSE. Home Depot allows investors to participate in a direct stock purchase program without going through a broker.

4. Explain how the trading is performed on your chosen exchange.

The NYSE is a physical exchange, where most of the trading takes place on a trading floor. Another name for that type of exchange is a listed exchange:

Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is human contact in this process, don't think that the NYSE is still in the stone age: computers play a huge role in the process. (Investopedia, 2009).

5. Identify and explain one major index utilized by your chosen exchange.

The Dow Jones Industrial Average is one major index utilized by the NYSE. The index refers to a collection of stocks and how they are performing in the market. The DJIA is "maintained and reviewed by editors of the Wall Street Journal." (Dow Jones and Company, 2009). There are multiple Dow Jones averages, and their composition works in the same manner:

For the sake of continuity, composition changes are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a component's core business. When such an event necessitates that one component be replaced, the entire index is reviewed. As a result, multiple component changes are often implemented simultaneously.

While there are no rules for component selection, a stock typically is added only if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sector(s) covered by the average. (Dow Jones and Company, 2009).

The DJIA serves "as a measure of the entire U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods." (Dow Jones and Company, 2009). The stocks selected for the DJIA generally have excellent reputations, sustained… READ MORE

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