Newbie Lesson - How do the markets work?
Sellers and buyers trade stocks on exchanges such as the NASDAQ and NYSE.
But, what is an Exchange?
A stock exchange or bourse is a place (physical or electronic) where sellers and buyers trade stocks.
The biggest ones in the U.S. are NASDAQ, NYSE, and AMEX.
Their names are acronyms:
* NASDAQ = National Association of Securities Dealers Automated Quotations
* NYSE = New York Stock Exchange
The stock markets enable companies to raise capital by selling their stocks.
And also allow shareholders to make their stocks liquid (cash out your investment). It’s a win-win. :)
To understand how stocks are traded we have to distinguish between 2 kinds of markets.
Primary Markets refer to the first time a company issues shares/stock to the public.
This is also called IPO:
IPO stands for: Initial Public Offering
(Note: sometimes words seem to be jargon but indeed they are acronyms.)
Let's see how the primary market works with an example.
How did Snapchat go public?
1) Snapchat calculated their capital needs and determined the amount of money they wished to raise from investors.
Snap raised $3.4 billion!!
2) Snapchat hired a bank to do a roadshow with potential investors.
They sell the benefits (as well as the risks) of investing in Snapchat.
3) The company set a price to sell the initial shares.
After hearing from all the potential investors, Snapchat set the stock price at $17.
4) The investors who want to buy Snapchat stocks at the IPO, call the bank and set up an order at the price determined. In this case $17.
5) On March 2nd, 2017, Snapchat stocks started to trade on NYSE
The secondary markets refer to the buying and selling of all the stocks that are already issued. We can call these "old" stocks.
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