Companies have to meet the requirements of the exchange in order to have their offerings listed and traded there. To trade on the NYSE (New York Stock Exchange), for example, a company must have issued at least a million shares of stock worth $16 mil and must have more than $2.5 million net income (1998 requirements).
Since the crash of 1929, brokers on American exchanges have had the obligation to assure an orderly and fair market by intervening when the price of a stock seems to be rising or falling too fast - The crash also launched a whole new topic in Economics - Efficient Markets Theory. Each of the 3000 or so stocks traded on the NYSE is handled by a specialist--all buys and sells are directed to him, and he matches buyers and sellers. Even before the crash, this was a necessary function because of the conditions that are frequently attached to transactions--someone may want to pay $40 per share but only for round lots (blocks of 100 shares), another person may want to sell only with early settlement. Since then, though, specialists have the authority and the obligation to prevent the market from running wild. A specialist may halt the fall of a stock price by using his own company's funds to buy shares, which can later be sold gradually. He has a reserve of the stock which can release for sale if a shortage is driving the price up too rapidly. Trading can be suspended altogether.
The NASDAQ (National Association of Securities Automated Quotation System) is not an exchange in this sense. It is an ongoing computer record of stock quotes (current buy and sell prices) for a large number of companies. Brokers can use these quotes to guide them in filling their clients' orders.
The NASD also has a quotation system for the stocks of smaller companies, which is called the OTC(Over the Counter) Bulletin Board. A company does not have to meet very high standards to be listed there, although the NASD has since January 1999 required that listees at least file current financial information with the SEC or other regulatory agencies. (The National Quotation Bureau publishes weekly "pink sheets" of trade information about stocks of 3,600 or so companies that do not even meet the listing requirements of the OTC Bulletin Board.) Now, many of the companies listed in these secondary sources are in fact failing and some of them have been used in price-manipulating frauds. But many are sound businesses with stocks that do not trade at high enough prices or in large enough volumes to require listing on major exchanges. In the tech-stock recession of spring 2001, some computer and internet companies were delisted by the NASDAQ and added to the OTC Bulletin Board because the price of their stocks fell to pennies on the dollar. Some may be relisted in the future.
AMEX, the American Stock Exchange, is now a subsidiary of the National Association of Security Dealers. It has specialists to process orders in 1000 or so stocks and bonds and also trades what are known as options and derivatives, various sales contracts conditioned on some future value of a stock or bond. Once known as "the curb exchange," it represents a broader spectrum of American business than the NYSE because it handles the offerings of companies that do not qualify for listing on "the big board."
Derivatives, currency, and commodities--that is, agricultural products and industrial raw materials--are handled by a number of specialized exchanges.
The Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) were both founded as grain markets. The CBOT now handles heavy trading in financial futures and options including those based on United States government and agency bonds. The Chicago Board of Trade has also created a separate exchange, CBOE (Chicago Board Options Exchange) which trades in a number of options but is best known as the primary marketplace for options based on market indices such as the Dow Jones.
An option, by the way, is a contract to buy or sell something at an agreed-upon price during a specified period. A buyer who believes that the price of a stock will rise can enter a contract known as a "call" which gives him the right to buy another's stock at a date three to nine months in the future. He pays a fee to the owner of the stock and will forfeit it if he does not exercise the option. But if the stock price rises enough, he can exercise the option and buy the stock at the fixed price, then re-sell it for a higher price to recover his premium and make a profit.
Someone who thinks that the price of a stock is about to fall can write a "put" contract with someone else who agrees to buy the stock at a fixed price. He does not have to own the stock at the time the contract is made. Again, he pays a premium. But if the stock price does fall, he can buy the stock at a low price on the market and then sell it for agreed-upon higher price.
Option contracts are traded like stocks, often by people who have no intention of exercising them. Although there is a guaranteed loss of the premium when an option is not exercised, there is enormous potential profit from trading the option itself--its price rises or falls with the price of the underlying stock. Someone who has a guaranteed buyer for 10,000 shares of stock at $35 has a contract of enormous value if the price of the stock falls to $10. He may not want to invest $100,000 to fulfill the contract and earn $350,000. But someone will want to buy the contract from him for more than he paid for it.
All of the exchanges listed above, and some others listed below, have web sites that provide not only market information but introductions to the institutions themselves.
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