In order to understand the stock market it is first necessary to understand stocks. A share of stock is a record of partial ownership in a company. Companies issue stock in order to raise capital. Investors who purchase stock are actually buying a small portion of the company. This gives them the right to a share of the income, and a say in how the company is run.
Stock investors, however, are not held liable for debt obligations the company may default on, or lawsuits it may face. Holders of common stock are shielded from these expenses. If a company goes bankrupt the stock may become worthless, but stockholders will not be obligated to make further payments.
There are privately held companies and publicly held companies. Although a privately held company may issue stock to selected individuals, this stock is not listed on the national exchanges. The companies that have stocks listed for trading on the national exchanges, such as the New York Stock Exchange, JSE and the NASDAQ, are public companies, meaning that ownership in the company is available to the general public through the purchase of common stock.
The first time a company issues stock to the general public, the sale is referred to as an initial public offering or IPO. If a company already has publicly traded stock and wishes to raise further capital by issuing more stock, the sale is called a secondary offering. Secondary stock offerings are made to raise additional capital. Generally this additional capital is used in an attempt to expand the company’s business in one way or another, although it is sometimes be used to pay off existing debt.
As long as a company meets certain basic requirements, its publicly issued stock is available for trading on the national exchanges.
The national stock exchanges such as the JSE (Johannesburg Stock Exchange), NYSE (New York Stock Exchange) and the NASDAQ (National Association of Securities Dealers Automated Quotation System) do not offer trading directly to the public. They operate through member firms, the retail brokerage houses that in turn deal with the general public. Retail brokers fall into two main categories: the full service broker and the discount broker.
The current volume of trading in stocks is enormous and has increased steadily over the past 20 years. There seems to be plenty of business for both full service brokers and discount brokers. Each caters to different types of investors, however some traders have accounts with both full service and discount brokers.
There are a large number of brokerage houses to choose from and each offers a different array of customer benefits. Many traders choose a broker based on the commission fees that are charged for trades. Because of this, most discount brokerages have been lowering their fee structure as much as possible to compete for customers. The active trader interested in low commissions has many brokers to choose from now.
The full service brokerage companies generally emphasize the personal advice the customer will receive from an individual broker. This advice may include more than opinions on which stocks are good investments and extend to things such as retirement planning and tax considerations. The customer will pay for these extras through higher commission prices and in some cases extra management fees.