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Finance > Stocks
& Investments > Brokers & Securities
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BROKERS AND SECURITIES MARKETS
Introduction: Although investment choices can appear
numerous and complex, the process of implementing a decision once it has been
made is generally quite simple. The procedure involves placing an order with a
reliable broker or dealer. A transaction can essentially be completed within
minutes of placing an order. Sales are usually settled (fully transacted, with
ownership and funds changing hands) within five business days.
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Functions of Exchanges
Stock exchanges provide a meeting place for buyers and sellers.
The exchanges themselves do not buy or sell securities, nor do they fix prices.
Prices are determined by means of a two-way auction system.
The most well-known U.S. financial marketplace is the NYSE,
where the stocks of more than 2,000 companies, plus many bonds and other kinds
of securities, are traded. In addition, hundreds of additional stocks and
various other forms of investments are traded on the ASE, which is also in New
York City. In addition, transactions are made on a number of regional stock
exchanges.
Each stock traded on an exchange is typically allocated to one
or more specialist, who is generally expected to maintain a continuous and
orderly market in that security. This includes matching buy and sell orders
from others. In addition, specialists may also buy or sell stocks from their
own accounts to correct temporary supply imbalances between buyers and sellers.
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The Over-the-Counter Market: The OTC
market does not provide a meeting place for buyers and sellers in the same
manner as the exchanges. Rather, it is a network of independent dealers, many
of whom are part of a computerized communications system known as the NASDAQ
system. Unlike the auction markets of the exchanges, over-the-counter
securities are traded in a negotiated market. In many transactions the broker
or dealer will be a buyer or seller of a security for his or her own account.
In such trades, the dealer acts as a principal instead of an agent.
Stocks of some large and well-known companies, such as Apple
Computer, are traded on the OTC market. Many OTC stocks see relatively little
trading, however: Some of the companies are very small and have little publicly
traded stock available.
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Regulations for the Securities Industry:
The securities industry operates under various federal regulations and ethical
standards aimed at protecting investors. Safeguards include requirements for
full and fair disclosure in new security offerings. Most public corporations
also must file annual and quarterly financial statements so shareholders can
monitor how well their companies are doing. In addition, the Securities and
Exchange Commission (SEC) requires officers, directors, and principal
stockholders of most publicly owned companies to report any of their own
transactions in the stocks of their own company.
Aside from federal regulations, most states have laws providing
for the registration of brokers and dealers and the offering and sale of
securities to the public. In addition, the stock exchanges engage in
self-policing, not only in setting standards to be met by companies whose
securities are listed but also through prescribing rules of conduct, minimum
capital requirements, and so forth, for their own members. In the OTC market,
the National Association of Securities Dealers Inc. has standards and practices
for its members.
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Role of the Broker: Assuming you now
have a working knowledge of the securities business and are ready to invest
some of your money, the person to talk to is a broker. To find one, you may get
a recommendation from friends or associates or you can often find
advertisements in the financial section of your newspaper.
There are two kinds of brokers: full-service and discounters.
With full-service brokers, the commission (transaction fee) is typically
higher, but you will likely have access to information and investment advice
produced by the brokerage firm's analysts. However, more than one opinion on a
prospective investment is advisable before purchasing.
Opening a securities account is relatively easy. It largely
involves establishing your identity and depositing enough money to cover the
initial purchases you want to make. For higher-risk investing, such as buying
on margin, some additional forms need to be filled out, just as when you buy a
car or household goods on an installment plan. Your broker's role includes
seeking to execute your orders at the best possible prices. If you wish, the
broker will keep your securities for you and send you checks for dividends and
interest when these are received.
People sometimes feel embarrassed about the amount of money they
have to invest. They feel that the broker does not want to be bothered with
small sums. However, the NYSE and many larger member firms spend significant
advertising dollars to reach small, as well as large, investors. Relatively
modest sums may be invested on a periodic basis, particularly in mutual funds
but also in individual securities. As illustrated earlier, the power of
compounding can build such contributions into a sizable portfolio.
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