Week 11
Common stock market
Common stock market is
the market for trading equities, not including  ownership in a corporation.
preferred stock.
Common Stock Market
1. A stock market on which only common
shares are traded.
2. The supply and demand for common shares, wh
ether of a single company, sector, or a whole econo
my.
What Is Common Stock?
Common stock is a security that represents
ownership in a corporation. Holders of common
stock elect the board of directors and vote on
corporate policies. This form of equity ownership
typically yields higher rates of return long term.
However, in the event of liquidation, common
shareholders have rights to a company's assets only
after bondholders, preferred shareholders, and other
debt holders are paid in full. Common stock is
reported in the stockholder's equity section of a
company's balance sheet.
Understanding Common Stock
With common stock, if a company goes
bankrupt, the common stockholders do not receive
their money until the creditors, bondholders, and
preferred shareholders have received their
respective share. This makes common stock riskier
than debt or preferred shares. The upside to
common shares is they usually outperform bonds
and preferred shares in the long run. Many
companies issue all three types of securities. For
example, Wells Fargo & Company has several
bonds available on the secondary market. It also has
preferred stock, such as its Series L (NYSE: WFC-
L), and common stock (NYSE: WFC).
Larger US-based stocks are traded on a
public exchange, such as the New York Stock
Exchange (NYSE) or NASDAQ. As of 2019, the
former has 2800 stocks listed on its bourses, while
the latter has 3300 stocks listed. NYSE had a
market capitalization of $28.5 trillion in June 2018,
making it the biggest stock exchange in the world
by market cap.
KEY TAKEAWAYS
 Common stock is a security that represents
 In a liquidation, common stockholders
receive whatever assets remain after
creditors, bondholders, and preferred
stockholders are paid.
 There are different varieties of stocks traded
in the market. For example, value stocks are
stocks that are lower in price in relation to
their fundamentals. Growth stocks are
companies that tend to increase in value due
to growing earnings.
 Investors should diversify their portfolio by
putting money into different securities based
on their appetite for risk.
Common stocks are shares of ownership in a
corporation that afford their holders voting
rights. They vary from preferred stocks in two key
ways. Shareholders who own preferred stocks
receive dividend payments before shareholders of
common stocks, but preferred stocks do not come
with voting rights.1 (Kimberly Amadeo)
What Is Common Stock?
Stocks are traded on stock markets. In the
U.S., the most common of these are the New York
Stock Exchange and the Nasdaq Stock Market. That
makes stocks liquid as well as easy to price. As a
result, they are excellent indicators of the
underlying value of the assets.
Common stocks allow shareholders to vote
on corporate issues, such as the board of directors
and accepting takeover bids. Most of the time,
stockholders receive one vote per share.
Stockholders also receive a copy of the
corporation's annual report.
Many corporations also give stockholders
dividend payouts. These dividend payouts will
change based on how profitable the company is.
How Common Stock Works
Stocks are bought and sold throughout the
day on stock exchanges, and the price of a share of
a stock goes up or down depending on the demand.
Individual stock prices are affected by corporate
earnings and public relations announcements. All
stocks are affected by the health of the U.S.
economy overall.
You earn money from stocks in two ways:
from dividend payments or by selling the stock
when its price goes up. Of course, you also can lose
your entire investment if the stock price plummets.
Expected earnings drive demand for a stock.
If investors think a company's earnings will rise,
they will bid up the price of its stock, especially if
the current price is low compared to the company's
earnings, as measured by the price to earnings ratio.
Expected growth of revenue also impacts the
price, even if the earnings aren't there yet. This can
happen with a new company that has a lot of
promise.
Stocks are first issued in a company's initial
public offering. Before an IPO, companies typically
are privately held. By going public, such companies
can generate expand by generating capital received
in an IPO.
Common Stock vs. Preferred Stock
Shareholders who own preferred stock do
not have voting rights, but they do receive set
dividends that do not change before a corporation
calculates how much to spend on common stock
dividends.
If a company goes out of business or is
restructured in a bankruptcy, the assets are
distributed to bondholders first. Preferred
stockholders are next, and common stockholders are
last. In most cases, common stockholders will
receive nothing.
THIRD MARKET
What Is the Third Market? (WILL KENTON)
A third market consists of trading conducted
by non-exchange member broker-dealers
and institutional investors of exchange-listed stocks.
In other words, the third market involves exchange-
listed securities that are being traded over-the-
counter between broker-dealers and large
institutional investors.
The term "over-the-counter" typically refers to the
trading of securities that are not listed on widely-
recognized exchanges such as the New York Stock
Exchange (NYSE). These securities are instead
traded through a broker-dealer network, as the
securities don't meet the listing requirements of a
centralized exchange. In the case of the third
market, the securities are exchange-listed, but they
are not being traded through the exchange.
KEY TAKEAWAYS
 With a third market, exchange-listed
securities are traded by investors operating
outside a centralized exchange through a
network of broker-dealers and institutional
investors.
 Institutional investors, such as investment
firms and pension plans, tend to participate
in the third market, as do traders in the over-
the-counter markets.
 With over-the-counter markets, securities
that are not qualified for listing on
traditional exchanges are bought and sold
through a network of broker-dealers.
 Securities can often be purchased at lower
prices in the third market because there are
no broker fees.
Understanding the Third Market
The third market supports the primary and
secondary markets. The primary market describes
the issuance of new securities. The secondary
market is traditionally where seasoned securities are
exchanged among market participants. And now,
the third market is ancillary to the secondary
market, with an emphasis on OTC markets and
institutional investors.
How the Third Market Works
Before selling exchange-listed securities to a
non-member in a third market transaction,
a member firm must fill all limit orders on the
specialist's book at the same price or higher. Typical
institutional investors who take part in the third
market include investment firms and pension plans.
The third market brings together large investors
willing and able to purchase and sell their own
securities holdings for cash and immediate delivery.
Securities can be purchased at lower prices in the
third market because of the absence of broker's
commissions. 
Third-party trading systems bypass traditional
brokers and allow large and possibly rival
institutions' block orders to "cross" with each other.
Anonymity rules prevent either side from knowing
the identity of the counter-party. There are
additional rules and logics built into flow
management interfaces, but there is
some information that cannot be shared with the
public, which gives the transaction sufficient
anonymity.
FOURTH MARKET
Fourth market trading is direct institution-
to-institution trading without using the service
of broker-dealers, thus avoiding both commissions,
[1]
 and the bid-ask spread.[2] Trades are usually done
in blocks. It is impossible to estimate the volume of
fourth market activity because trades are not subject
to reporting requirements. Studies have suggested
that several million shares are traded per day.
Refers to the practice of institutional investors
trading large blocks of securities directly to avoid br
okerage commissions.  This provides companies with avenues to increase
The over-the-counter market for the sale of listed
securities between institutional
investors. For example, if a mutual
fund sells stock in Google to a hedge
fund without going through an exchange, the transa
ction is said to occur on the fourth market.  regularly and publicly report their financial
The market for securities in which large inve
stors bypass exchanges and dealers in order
to trade directly among themselves. Compare secon
dary market, third market.  ensure that management will make decisions that
Institutional investors, including mutual fun
d companies and pension funds, who trade 
large blocks of securities among themselves are ope
rating in what's called the fourth market.
Usually, the transactions are handled through electr
onic communications networks (ECNs).
Among the appeals of using an ECN are reduced tra
ding costs, the ability to trade after hours,  invest their cash, as opposed to merely saving these
and the fact that offers to buy and sell are matched a
nonymously.
STOCK EXCHANGE
What is a Stock Exchange?
A stock exchange is a marketplace where
securities, such as stocks and bonds, are bought and
sold. Bonds are typically traded Over-the-Counter
(OTC), but some corporate bonds can be traded on
stock exchanges. Stock exchanges allow companies
to raise capital and investors to make informed
decisions using real-time price information.
Exchanges can be a physical location or an
electronic trading platform. Though people are
typically familiar with the image of the trading
floor, many exchanges now use electronic trading.
Purpose of Stock Exchanges
Stock exchanges act as an agent for the
economy by facilitating trade and disseminating
information. Below are some of the ways exchanges
contribute:
 
1. Raising Capital
Through initial public offerings (IPO) or
issuing of new shares, companies are able to raise
capital to fund operations and expansion projects.
growth.
 
2. Corporate Governance
Companies that are publicly listed on a stock
exchange must conform to reporting standards that
are set by regulating bodies. This includes having to
statements and earnings to their shareholders.
The actions of a company’s management are
constantly under public scrutiny and directly affect
the value of the company. Public reporting helps
benefit the goals of the company and its
shareholders, thereby acting efficiently.
 
3. Economic Efficiency
In addition to encouraging management
efficiency, exchanges also facilitate economic
efficiency through the allocation of capital. Stock
exchanges provide an avenue for individuals to
funds. This means that the capital that would
otherwise be untouched is utilized towards
economic benefits, resulting in a more efficient
economy.
 In addition, exchanges also provide are traded. It includes both exchanges and OTC
liquidity, as it is relatively easy to sell one’s market. Exchange refers to the formally established
holdings. By providing liquidity and real-time price stock exchange wherein securities are traded and
information on company shares, the stock exchange they have a defined set of rules for the participants.
also encourages an efficient market by allowing When the trading is performed through the
investors to actively decide the value of companies exchange, it is under the supervision of the
through supply and demand. exchange and so it ensures that all the rules and
  regulations are duly complied with.
OVER THE COUNTER (OTC) Conversely, Over the Counter, shortly known
as OTC is a dealer oriented market of securities,
What does over the counter (OTC) mean? which is a decentralized and unorganized market
OTC stands for over-the-counter. In trading where trading happens by way of phone, emails, etc.
terms, over-the-counter means trading through The difference between OTC and Exchange are
decentralised dealer networks. A decentralised discussed below in detail.
market is simply a market structure consisting of
various technical devices. This structure allows Comparison Chart
investors to create a marketplace without a central
location. The opposite of OTC trading is
exchange trading, which takes place via a BASIS FOR OTC (OVER THE
EXCHANGE
centralised exchange. COMPARISON COUNTER)
An example of OTC trading is a
security, currency, or other financial product Meaning Over the Counter or Exchange is an
being bought through a dealer, either by OTC is a organized and
telephone or electronically. Business is decentralized dealer regulated market,
typically conducted by telephone, email and market wherein wherein trading of
dedicated computer networks. The OTC market brokers and dealers stocks takes place
is arranged through brokers and dealers who transact directly via between buyers and
negotiate directly. An advantage of the OTC computer networks sellers in a safe,
market is that non-standard quantities of stock and phone. transparent and
can be traded. systematic manner.

The OTC market often includes smaller Market maker Dealer Exchange itself
securities. It consists of stocks that do not need
to meet market capitalisation requirements. Used by Small companies Well established
OTC markets could also involve companies that companies
cannot keep their stock above a certain price per
Physical Location No Yes
share, or who are in bankruptcy filings. These
types of companies are not able to trade on an
Trading hours 24×7 Exchange hours
exchange, but can trade on the OTC markets.
Stocks Unlisted Stocks Listed Stocks
Difference between OTC and Exchange
Transparency Low Comparatively high
Secondary market refers to a market
wherein already issued securities and financial Contracts Customized Standardized
instruments are traded. It includes both
exchanges and OTC market. Exchange refers to the
formally established stock exchange wherein
securities are traded and they have a defined set of
rules for the participants.
Definition of OTC
Secondary market refers to a market wherein
already issued securities and financial instruments
 OTC or Over the counter market is a
decentralised market for unlisted securities, not
having a specific physical location, rather the
firms/persons involved in trading directly negotiate
over a communication network such as telephone
lines, emails, computer terminals, etc. Trading Over
the counter is also called off-exchange trading,
because of the absence of a formal exchange.
In general, those companies which do not
fulfil the prerequisites of the stock exchange for
listing their stocks, trade them over the counter. The
trade takes place between two companies or
financial institutions. Financial products such as
bonds, derivatives, currencies, etc. are mainly
traded OTC.
It is a dealer’s market, where they buy and
sell the financial products for their account and the
investors can directly contact the dealers, who are
interested in selling their stocks or bonds they have
or they can talk to the brokers, who will find out the
dealers offering the stocks with the best price.
The dealers making the market for a certain
securities quote the price at which they are going to
pay for the stock called as the bid price and the rate
at which they are going to sell the stock is
called ask price. Here, the bid-ask spread implies
the amount left in-between the bid and asked prices
indicating the markup of the dealer.
Definition of Exchange
Exchange refers to the exchange-traded
market, which refers to a centralized and regulated
financial market, where securities, commodities,
derivatives, etc. of listed companies are bought and
sold between stockbrokers and traders.
The prices of securities such as shares,
debentures, notes, corporate bonds, etc. are decided
by the market demand and supply forces. It can be a
physical trading location such as premises, etc. or it
can be an electronic platform, i.e. website.
It has an association of persons (registered
or unregistered) commonly referred to as member
brokers. It is established with the aim of governing
the trade of securities by the general public and
companies, as a whole. There is a set of rules
imposed by the Exchange on the firms and brokers,
which participate in the trading of securities.
Features of an Exchange
 Trading of Securities: The first and
foremost function of a stock exchange is to
provide a formal platform for trading of
securities and liquidating them whenever an
investor needs to encash them, at the
prevailing market price. Moreover, it
provides the flexibility to the investor to
change their portfolio whenever required.
 Ascertainment of price: An Exchange-
traded market is one of the best examples of
perfect competition, because of the presence
of many buyers and sellers in the market. As
the market is transparent, all the necessary
information is available and so active
bidding takes place and in this way, the price
is decided.
 Raising funds: Stock exchange is
commonplace for the companies and
governments to generate funds from the
market by offering securities for sale to the
general public.
 Mobilization of savings: People invest their
savings in the share market, to earn good
returns and make money out of their
investments. In this way, the savings of the
public is mobilized and channelised by the
stock exchanges, by investing their money in
different sectors, which generate high
returns.
 Trades in second-hand securities: In an
exchange, only those securities are traded
which are previously issued by the
companies through a public offering in the
primary market.
Other Key Difference Between OTC and
Exchange
The difference between OTC and Exchange can be
drawn clearly on the following grounds:
 Exchange implies a trade exchange which
can be an organization or institution that
hosts a market where stocks of listed
companies are traded between the buyers
and sellers. On the other hand, OTC
expands to over the counter, which refers to
a decentralised market, wherein buyers look
for sellers and vice versa to communicate
with each other by way of computer
network or phone.
  In an over the counter market the dealers flexibility to change the investment portfolio at any
play the role of market makers, as they time, less risk and maintenance of fair price.
quote the price at which the securities and
other financial instruments are bought and
sold between the participants. Conversely,
in case of an exchange, the trading
exchange is the market maker, as the prices
are determined by the demand and supply
forces.
 The companies which do not follow the
guidelines and meet the requirements of the
exchange often trade their securities OTC,
which are generally small companies. As
against, big business houses usually go for
listing and trading their stocks through an
exchange.
 One of the main difference between these
two is that an exchange is physically
present, wherein the open outcry method is
used. In contrast, OTC has no physical
location, everything is phone-based or
computer-based.
 In an exchange, trading is performed during
trading hours only. On the contrary, in
OTC, trading is performed 24×7.
 When it comes to transparency, the OTC
market is not as transparent as an exchange,
where the participants have complete
information and knowledge about the
securities being traded.
 In case of an exchange only standardized
products, in terms of quality and quantity
are dealt, whereas in case of an OTC the
contracts are customized as per the
requirement.
 Due to short term imbalance between the
demand and supply, there is no mechanism
in the OTC market to stop acute highs or
lows in the security prices. However, in an
exchange, these imbalances in prices are
managed by exchange halting trading in a
particular stock, that lets the additional
participants restore market equilibrium.

Conclusion
At the end of the discussion, we can say that
an exchange is obviously a step ahead of the OTC
due to certain reasons such as it provides liquidity to
encash the securities whenever required,
transparency in terms of availability of information,