Page 180 - Initial Public Offering - An Introduction to IPO on Wall Street

The New York Stock Exchange (NYSE), NASDAQ, and the Chicago Board Options
Exchange CBOE) are the main stock exchanges in the US.

Along with many other exchanges existing in the country, these major national exchanges
constitute the U.S. stock market. While it is called a stock market or share market and is
mainly known for selling stocks/equities, other financial instruments are also exchanged on
the stock markets, such as exchange-traded funds (ETFs), corporate bonds, and stock-based
options, bonds, currencies, and commodities.

12.1.1 How the Stock Market Works
In short, stock markets provide a stable and controlled environment where market players can
rely on zero to low operating risk transactions in shares and other qualifying investment
vehicles with confidence. The stock markets operate as primary markets and as secondary
markets, functioning under the specified rules as prescribed by the regulator.

The stock market, as the primary market, enables businesses to issue and sell their shares to
the general public for the first time via the IPO process. This activity allows businesses to
collect requisite investor capital. This implies that a corporation is divided into several shares
(assume, 20 million shares) and sells a portion of those shares (assume, 5 million shares) at a
price (assume, $10 per share) to the general public.

A firm needs a platform where these securities can be traded to support this process. The
stock market offers that platform or marketplace. The business would successfully sell the 5
million shares for $10 per share and raise $50 million in total if all goes according to the
plans.

In expectation of a rise in the share price and any future dividends in the shape of dividend
payments, investors will acquire the company stock that they may decide to hold for the
desired duration. The stock exchange serves as a facilitator for this form of capital generation
and earns a commission from the business and its financial partners for its services.

After the first-time stock offering IPO procedure called the listing process, the stock
exchange also acts as the trading platform that enables the daily purchase and sale of the
listed shares. The secondary market is what this is. For any transaction that occurs on its
platform during secondary market operation, the stock exchange receives a fee.

In such trading practices, the stock market becomes responsible for maintaining market
transparency, fair trade, price discovery, and liquidity. The exchange operates trading
systems that effectively handle buying and selling orders from different market participants,
as nearly all large stock exchanges around the world now function electronically. To promote
trade execution at a price fair for both sellers and buyers, they undertake the price matching
role.

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