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Stocks 101

So, what is a stock anyway? Buying a stock signifies buying a piece of the company it’s issued from. It’s an ownership position. Owning stock in a company means a piece of every desk, computer and most importantly a portion of the company’s profits belongs to you. Stock in a particular company can be bought and sold through a brokerage and a stock exchange. A company’s stock is purchased by an investor when it is believed that there will be an increase in demand and therefore an increase in price of the company stock. What would cause an increase in demand? This would be based on fundamental analysis as to the company’s ability to increase its profits going forward. If investors believe the Corporation is going to grow its profits, there will be an increase in demand for the company stock. By contrast, if the belief is that there is a threat to a company’s ability to generate profits going forward, they will sell the stock creating an oversupply and drive the price lower. So why would a company sell some or much of their ownership?

Companies need capital to invest in new equipment, to conduct research and development and pay its current bills. A long time ago an entrepreneur created the idea of selling ownership shares in his company in order to generate usable cash. The entrepreneur now had an advantage over his competitors by allowing him to fund his purchases of more efficient equipment. The idea caught on with banks and manufacturing firms and gave birth to the concept of investor ownership positions.

How were stocks initially traded, and how did US stock exchanges come into being?

In the early to mid-1700s, shipping companies and banks began selling shares of their companies in exchange for capital. A great deal of that activity was occurring in lower Manhattan which at the time was a very active shipping port. As the concept of buying and selling shares of the company grew, the docks became very crowded with investors and representatives of the companies looking to sell their stock. Too crowded in fact. At that point, it was decided to move to an area just north of the docs which we now know as Wall Street.

On May 17, 1792, twenty-four stockbrokers gathered outside 68 Wall Street under a buttonwood tree to sign an agreement that would establish the rules for buying and selling bonds and shares of companies. The Buttonwood Agreement, as it is known, is so named because the tree served as the regular meeting place for these pioneers of Wall Street. The signers of the Buttonwood Agreement drafted their first constitution on March 8th, 1817, and named their nascent organization the New York Stock & Exchange Board.

In 1863, this name was shortened to its modern form, the New York Stock Exchange, which became known as the NYSE, one of the best-known financial industry brands in the world. Membership on the NYSE has been held as a valuable property since 1868.

The stock market continued to operate outdoors on Wall Street until 1921. At that time the building with the New York Stock Exchange is now housed was purchased and the exchange moved indoors.

Until the NYSE went both electronic and public in April 2006, the exchange was a membership-only organization. You could only join the NYSE by purchasing existing seats, which were limited to a total of 1,366.

Who oversees the stock markets?

So how is the individual investor protected from unscrupulous companies who would seek to defraud their investors? The process of securities issuance and regulation belongs to the Securities and Exchange Commission, SEC. They establish and enforce the rules and procedures when a company wishes to issue stock. The SEC is also responsible for the laws governing brokerages and stock exchanges. All companies who have publicly traded stock must report and file quarterly as well as annual reports to the SEC. The SEC does its best to protect the individual investor, though not perfect and in an ever evolving state.

Jeff McAllister
OptionsANIMAL Instructor

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