it differs from common stock in several important ways. First, because preferred
stockholders receive a fixed dividend that never changes, a share of preferred stock
is as much like a bond as it is like common stock. Second, because the dividend
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Part 5 Financial Markets
does not change, the price of preferred stock is relatively stable. Third, preferred
stockholders do not usually vote unless the firm has failed to pay the promised div-
idend. Finally, preferred stockholders hold a claim on assets that has priority over the
claims of common shareholders but after that of creditors such as bondholders.
Less than 25% of new equity issues are preferred stock, and only about 5% of
all capital is raised using preferred stock. This may be because preferred dividends
are not tax-deductible to the firm but bond interest payments are. Consequently, issu-
ing preferred stock usually costs the firm more than issuing debt, even though it
shares many of the characteristics of a bond.
How Stocks Are Sold
Literally billions of shares of stock are sold each business day in the United States.
The orderly flow of information, stock ownership, and funds through the stock mar-
kets is a critical feature of well-developed and efficient markets. This efficiency
encourages investors to buy stocks and to provide equity capital to businesses with
valuable growth opportunities. We traditionally discuss stocks as trading on either an
organized exchange or over the counter. Recently, this distinction is blurring as
electronic trading grows in both volume and influence.
Organized Securities Exchanges
Historically, the New York Stock Exchange
(NYSE) has been the best known of the organized exchanges. The NYSE first began
trading in 1792, when 24 brokers began trading a few stocks on Wall Street. The NYSE
is still the world’s largest and most liquid equities exchange. The traditional defini-
tion of an organized exchange is that there is a specified location where buyers and
sellers meet on a regular basis to trade securities using an open-outcry auction model.
As more sophisticated technology has been adapted to securities trading, this model
is becoming less frequently used. The NYSE currently advertises itself as a hybrid
market that combines aspects of electronic trading and traditional auction-market
trading. In March of 2006, the NYSE merged with Archipelago, an electronic com-
munication network (ECN) firm. On April 4, 2007, the NYSE Euronext was created
by the combination of the NYSE Group and Euronext N.V. NYSE Euronext completed
acquisition of the American stock exchange in 2009.
There are also major organized stock exchanges around the world. The most
active exchange in the world is the Nikkei in Tokyo. Other major exchanges include
the London Stock Exchange in England, the DAX in Germany, and the Toronto Stock
Exchange in Canada.
To have a stock listed for trading on one of the organized exchanges, a firm
must file an application and meet certain criteria set by the exchange designed to
enhance trading. For example, the NYSE encourages only the largest firms to list
so that transaction volume will be high. There are several ways to meet the minimum
listing requirements. Generally, the firm must have substantial earnings and mar-
ket value (greater than $10 million per year and $100 million market value).
About 8,500 companies around the world list their shares on the NYSE Euronext.
The average firm on the exchange has a market value of $19.6 billion. On October 28,
1998, the NYSE volume topped 1 billion shares for the first time.
1
By 2010, daily
volume was usually in excess of 4 billion shares with 7 billion shares being traded
on peak days.
Find listed companies,
member information, real-
time market indices, and
current stock quotes at
www.nyse.com
.
G O O N L I N E
1
NYSE Fact Book,
www.nyse.com
.
Chapter 13 The Stock Market
305
Regional exchanges, such as the Philadelphia, are even easier to list on. Some
firms choose to list on more than one exchange, believing that more exposure will
increase the demand for their stock and hence its price. Many firms also believe
that there is a certain amount of prestige in being listed on one of the major
exchanges. They may even include this fact in their advertising. There is little con-
clusive research to support this belief, however. Microsoft, for example, is not listed
on any organized exchange, yet its stock had a total market value of over $251 bil-
lion in late 2010.
Over-the-Counter Markets
If Microsoft’s stock is not traded on any of the orga-
nized stock exchanges, where does it sell its stock? Securities not listed on one of the
exchanges trade in the over-the-counter (OTC) market. This market is not organized
in the sense of having a building where trading takes place. Instead, trading occurs
over sophisticated telecommunications networks. One such network is called the
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