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New York Stock Exchange

New York Stock Exchange

What It Means

The New York Stock Exchange (NYSE) is the oldest stock exchange in the United States. It is also the largest stock exchange in the world, in terms of the value of stocks that are bought and sold there.

Stocks are shares of ownership in a company. By selling stocks, a company is able to amass money that it can use to expand its operations. If the company prospers, shares of its stock rise in value, and stockholders profit. If a company struggles, the value of its shares declines, and stockholders lose money. At a stock exchange, people buy and sell stocks, either through intermediaries known as stockbrokers or via computers, hoping to get rid of unprofitable stocks and acquire profitable ones. There are numerous stock exchanges in the United States, and there are large stock exchanges in most developed countries.

The NYSE is an exchange specializing in the stock of large companies. All stock exchanges have minimum requirements that companies must meet to be listed (to be allowed to sell stock on the exchange). A company must prove that its earnings rise above a certain level, that it can issue a certain amount of stock, that it has a certain amount of capital (money, equipment, property, and other resources for doing business), and that it is otherwise in good financial condition. As of 2007 there were more than 2,700 stocks listed on the NYSE.

The NYSE is located at the corner of Wall and Broad streets in New York City. Most other prominent stock exchanges have been thoroughly computerized, but many NYSE trades still take place in person on the floor of the exchange. To trade at the NYSE, a person must be a member of the exchange (or the representative of a member). The number of memberships is limited to 1,366, but memberships can be bought and sold. The highest price ever paid for a membership, as of 2007, was $4 million.

When Did It Begin

After the Revolutionary War (1775–83) the U.S. government was in debt to those people who had financed the war. It needed to raise money to pay back these creditors. In 1790, as other governments before it had done, the U.S. government began selling shares of its debt in order to raise money. This meant that a person could loan the government money to cover a portion of the nation’s debt, and in return for doing so, the government would pay him or her a fee, called interest, periodically for the length of the loan.

Instead of this being a simple loan (where the original borrower would have to be paid back), the purchaser of debt was buying what is called a security, a contract that is declared to have value and that can be traded. Because these securities collected interest, a person could gain money simply by holding them. People began to buy and sell government securities from each other, and this led to the development of a securities market. As with any market, the forces of supply and demand were at work (in this case, the quantity of shares for sale versus the number of people who wanted to buy them), causing the prices of securities to fluctuate. This arrangement allowed the government to raise the money it needed while also creating wealth-building opportunities that had not existed before.

By 1792 people in New York City could buy five different securities. Three of these were forms of government debt, and two were shares of stock in banks. It was in this year that 24 businessmen met on Wall Street in New York City, under a buttonwood tree, to discuss arrangements for the formal buying and selling of securities. They agreed to buy and sell securities with each other on a commission basis (people who wanted to buy and sell stocks would place orders with these men, who would charge a fee for their services). The so-called Buttonwood Agreement laid the foundations for what became known, in 1817, as the New York Stock and Exchange Board. In 1863 the organization changed its name to the New York Stock Exchange.

More Detailed Information

In the early stages of the New York exchange, its members carried out trades on behalf of investors at designated times. The exchange’s president would read out a list of stocks that could be traded, one at a time, and traders would buy and sell stocks as they were called out. There was a morning trading session and an afternoon trading session. In 1871, however, to facilitate more efficient investment, the NYSE moved to a system of continuous trading. Under this system so-called specialists, who orchestrated sales of a particular stock, were posted at a specific spot on the floor of the stock exchange, and members who had orders to buy or sell that stock went to that spot at any point during trading hours to conduct their transaction. This form of continuous trading has remained standard practice at the NYSE ever since.

The buying and selling that occurs on the floor of the NYSE is only the last stage of the trading process. A trade begins with an individual’s desire to buy or sell one or more stocks on the NYSE. This person may be anywhere in the world.

As an illustration of the stock-trading process, imagine an individual investor, Kate, who lives in Florida and wants to buy up to $1,000 worth of stock in the computer company IBM, which is traded on the NYSE. Kate has researched IBM’s past performance and potential for future profits, and she believes that buying stock in the company today is a good idea. She calls her stockbroker, Joe, who also lives in Florida but is affiliated with Merrill Lynch, a financial-services firm that is a member of the NYSE and is therefore entitled to carry out trades on the exchange floor. Joe agrees with Kate’s analysis that IBM is a good bet, and he tells her that the market price for IBM that day should be about $95 per share. Kate authorizes Joe to spend $950 to buy 100 shares on her behalf. Joe enters Kate’s order into his computer, sending it to a Merrill Lynch broker on the floor of the NYSE.

Fred, a Merrill Lynch floor broker at the NYSE, receives the order (either as a computer printout or on a handheld computer), which informs him that he needs to buy 100 shares of IBM stock. He goes over to the spot on the trading floor that is reserved for the buying and selling of IBM stock. There he finds another floor broker, Roger, who is looking to sell IBM stock for his own client. Fred and Roger agree on a price, facilitated by Tina, the IBM specialist on the floor responsible for ensuring that trades are carried out fairly. Tina records the sale, and the terms of the sale are transmitted to Merrill Lynch as well as to Roger’s brokerage firm.

At this point Kate’s order is completed. She owns 100 shares of IBM stock, and she has the potential to profit or lose money as the value of IBM shares fluctuates. She has to pay the total value of her stock purchase, plus a commission that goes to the brokers, within three days.

Recent Trends

Today the NYSE is unique among the major world stock exchanges in its continued reliance on person-to-person trading on the floor of the stock exchange. On the other most prominent American stock exchange, the National Association of Securities Dealers Automated Quotations (NASDAQ), all trades occur entirely within computer systems. Most of the world’s other large stock exchanges, such as the London Stock Exchange and the Tokyo Stock Exchange, operate almost exclusively through electronic trading.

The NYSE has increasingly integrated electronic trading with its traditional specialist-based trading on the floor. As of 2007 roughly 50 percent of stock trades on the NYSE were made electronically. The exchange did not plan, however, to abandon person-to-person trades completely. Instead, it intended to remain a hybrid exchange, where some transactions are computerized and others are conducted in person.

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