Optimizing Your Stock Market Goals: A Comprehensive Guide to Succeeding in the United States’ Stock Market

Stock Market – What is it?

The stock market is a place where investors can buy and sell shares of publicly held companies. These transactions can take place on formal exchanges or over-the-counter marketplaces that operate under a set of regulations. Unlike a physical supermarket, the stock market exists in electronic form, allowing investors to access it from their computers. Stockbrokers also play a role in facilitating transactions on the stock market.

It’s important to note that the terms “stock market” and “stock exchange” are often used interchangeably. Traders can buy or sell shares on one or more of the stock exchanges that are part of the overall stock market.

The primary purpose of the stock market is to provide a venue for investors to buy and sell individual company shares, funds, or other financial products. Price discovery is a mechanism used to determine the value of these financial products, based on fundamental and technical analysis. As changes in share prices occur, investors can buy or sell the products they are interested in owning.

Understanding the market ecosystem and the various entities involved in the stock market is crucial for investors. With the help of stockbrokers and access to electronic platforms, investors can easily transact and participate in the stock market. This participation can lead to financial growth and a more diversified investment portfolio.

In addition, a stock market is also referred to as an equity market or share market. It’s an aggregation of buyers and sellers of stocks, which represent ownership claims on businesses. These stocks can include securities that are listed on public stock exchanges, as well as privately traded stock, such as shares of private companies sold to investors through equity crowdfunding platforms.

The US Stock Exchange

The leading U.S. stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq.

The NYSE, founded in 1790, is a New York-based stock exchange. To be listed on the NYSE, a company must meet certain requirements. Although the exchange’s building can be seen in New York City, most trading is now done electronically.

Nasdaq, created by the National Association of Securities Dealers (NASD) in 1971, is the largest electronic screen-based market. It is popular due to its computerized system and lower listing fees than NYSE. It includes large companies like Apple, Google, Amazon, and Microsoft.

Some of the additional stock exchanges in the United States of America are –

1. Boston Option Exchange (BOX)
2. Boston Stock Exchange (BSE)
3. Chicago Stock Exchange (CHX)
4. Chicago Board of Trade (CBOT)
5. Chicago Board Options Exchange (CBOE)
6. Chicago Mercantile Exchange (CME)
7. Investors Exchange (IEX)
8. International Securities Exchange (ISE)
9. Miami International Securities Exchanges (MIAX)
10. Miami Stock Exchange (MS4X)
11. Philadelphia Stock Exchange (PHLX)
12. The Toronto Stock Exchange (TSX)

Market Participants

The stock market is a diverse space that attracts individuals and corporations with various backgrounds. These participants are collectively known as market participants, and they can be classified into various categories such as –

Individual Stock Investors – These are people like you and me transacting in markets

Asset Management Companies (AMC) – Fund companies like Vanguard, Fidelity Investments, American Funds etc.

Institutional Investors – These could be foreign asset management companies, banks, insurance companies, hedge funds, and other large investors.

The common agenda of all these participants is to make profitable transactions and earn money. However, with the involvement of money, emotions such as greed and fear can run high, making it easy for individuals to engage in unfair practices. This is where regulation and compliance come into play.

Stock markets need regulatory bodies to set the game rules and ensure that all participants adhere to them. By doing so, the markets become a level playing field for everyone. It is important to have a regulatory body to ensure fair practices in the market. This helps in building trust and confidence in the stock market and ensures that it remains a fair and transparent platform for all investors.

The Regulators and Parties to transactions

Securities Commissions

There are two commissions in charge of overseeing securities trading in the United States: the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The SEC is an independent agency of the federal government, with the primary responsibility of enforcing federal securities laws, proposing securities rules, and regulating the securities industry. This includes overseeing the stock and options exchanges, corporate and municipal bonds, as well as electronic securities markets in the US. The SEC is accountable to the US Senate Committee on Banking.

On the other hand, the CFTC governs activities in the derivatives markets, including designated contract markets, swap execution facilities, and derivatives clearing organizations. It also regulates intermediaries like swap dealers, futures commission merchants, and commodity pool operators. The CFTC falls under the oversight of the Senate Agriculture Committee.

Central Securities Depository

A Central Securities Depository (CSD) is a specialized financial institution that holds securities, like shares, in electronic form rather than physical certificates. This allows for easier transfer of ownership through book entry and enables brokers and financial companies to hold securities in one location for clearing and settlement. CSDs also provide centralized processing of transactions such as clearing and settlement of securities transfers, securities pledges, and securities freezes, making the process faster and more efficient.

There are three Central Securities Depositories and four clearing organizations in the US.

Central Securities Depositories:

1. Depository Trust Company (a subsidiary of Depository Trust & Clearing Corporation (DTCC)) – the primary securities depository
2. The Federal Reserve – for US government bonds and notes
3. Chicago Mercantile Exchange (CME) – for futures and other derivative contracts

Clearing Organizations:

1. National Securities Clearing Corporation (a subsidiary of DTCC) – for market-traded stocks and corporate bonds
2. Fixed Income Clearing Corporation (a subsidiary of DTCC) – for government bonds and mortgage-backed securities
3. Options Clearing Corporation (OCC) – for all equities related options
4. Intercontinental Exchange (ICE) – for energy related derivative contracts

Stock transfer agent

A stock transfer agent or transfer agency is a third-party entity responsible for managing the transfer of ownership of company stock or investment fund shares. They maintain a register of ownership, act as paying agents for dividends and distributions, and validate and register the purchase of new ownership shares. Transfer agents may offer their services along with other outsourced back-office services, such as fund administration and fund accounting.

Transfer agents are responsible for various functions, such as issuance and transfer of certificates, record keeping, registration, paying agent, shareholder liaison, repository for lost or stolen certificates, and treasury management. They issue and cancel certificates to reflect changes in ownership and keep records of who owns a company’s stocks and bonds, including how they are held. Transfer agents also monitor the issuance of securities to prevent unauthorized issuance and facilitate communications between issuers and registered security holders.

In addition, transfer agents may act as a tender agent or exchange agent in a merger or tender offer. They may also act as a proxy agent and mailing agent, running annual meetings as inspector of elections, proxy voting, and special meetings of shareholders. Transfer agents handle lost, destroyed, or stolen certificates, and may also serve as medallion signature stamp officers.

Lastly, transfer agents work to settle monetary transactions, holding shareholders’ cash and company’s cash in separate accounts to prevent loss in the event of bankruptcy or mismanagement of money. Transfer agents may be banks, trust companies, fund administration providers, or stand-alone transfer agent firms.

Custodian banks

Custodian banks play a crucial role in the safekeeping and administration of clients’ securities portfolios. While banks also offer passive safekeeping through safety deposit boxes, custodian banks specialize in active safekeeping services that involve receiving and delivering securities based on client instructions. They also provide clients with monthly statements of their holdings and credit their accounts with dividends, interests and other types of income.

Custodian banks also alert clients to pending corporate actions and act on their instructions. In addition, they provide annual tax-related information to clients. Custodian services are typically used by institutional investors rather than individual investors.

By offering active safekeeping services, custodian banks help institutional investors to manage their securities portfolios in a more efficient and streamlined manner. This allows clients to focus on their investment strategies and leave the safekeeping and administration of their securities in the capable hands of their custodian bank.

Prime brokers

Prime brokers are specialized broker-dealers that provide custody and other services to hedge funds. The prime brokerage service is considered to be more risky than traditional custody due to the perceived risk of hedge funds.

In the US, a hedge fund may use multiple broker-dealers to execute trades, but the prime broker assumes the risk of settlement for all trades as if they were executed solely through that broker. This has led to many hedge funds diversifying their holdings among multiple prime brokers in order to minimize the risk of a prime broker’s failure, as seen in the Lehman Brothers Europe collapse of 2008. Originally, the term “prime” referred to a hedge fund using one broker-dealer for custody and borrowing, but this has since changed with the diversification of holdings.