When you first see the trading floor, you might assume all brokers are the same, but they aren't. There are five categories of market professionals active on the trading floor.
Commission Brokers, usually floor brokers, work for member firms. They use their experience, judgment and execution skill to buy and sell for the firm's customer for a commission.
Independent Floor Brokers are individual entrepreneurs who act for a variety of clients. They execute orders for other floor brokers who have more volume than they can handle, or for firms whose exchange members are not on the floor.
Registered Competitive Market Makers have specific obligations to trade for their own or their firm's accounts-when called upon by an Exchange official-by making a bid or offer that will narrow the existing quote spread or improve the depth of an existing quote.
Competitive Traders trade for their own accounts, under strict rules designed to assure that their activities contribute to market liquidity.
And last, but not least, come Stock Specialists. The Exchange tries to preserve price continuity- which means that if a stock has been trading at, say, 35, the next buyer or seller should be able to an order within a fraction of that price. But what if a buyer comes in when no other broker wants to sell close to the last price? Or vice versa for a seller? How is price continuity preserved? At this point enters the Specialist. The specialist is charged with a special function, that of maintaining continuity in the price of specific stocks. The specialist does this by standing ready to buy shares at a price reasonably close to the last recorded sale price when someone wants to sell and there is a lack of buyers, and to sell when there is a lack of sellers and someone wants to buy. For each listed stock, there are one or more specialist firms assigned to perform this stabilizing function. The specialist also acts as a broker, executing public orders for the stock, and keeping a record of limit orders to be executed if the price of the stock reaches a specified level. Some of the specialist firms are large and assigned to many different stocks. The Exchange and the SEC are particularly interested in the specialist function, and trading by the specialists is closely monitored to make sure that they are giving precedence to public orders and helping to stabilize the markets, not merely trying to make profits for themselves. Since a specialist may at any time be called on to buy and hold substantial amounts of stock, the specialist firms must be well capitalized.
In today's markets, where multi-million-dollar trades by institutions (i. e. banks, pension funds, mutual funds, etc.) have become common, the specialist can no longer absorb all of the large blocks of stock offered for sale, nor supply the large blocks being sought by institutional buyers. Over the last several years, there has been a rapid growth in block trading by large brokerage firms and other firms in the securities industry. If an institution wants to sell a large block of stock, these firms will conduct an expert and rapid search for possible buyers; if not enough buying interest is found, the block trading firm will fill the gap by buying shares itself, taking the risk of owning the shares and being able to dispose of them subsequently at a profit. If the institution wants to buy rather than sell, the process is reversed. In a sense, these firms are fulfilling the same function as the specialist, but on a much larger scale. They are stepping in to buy and own stock temporarily when offerings exceed demand, and vice versa.
So the specialists and the block traders perform similar stabilizing functions, though the block traders have no official role and have no motive other than to make a profit.
3. SECURITIES. CATEGORIES OF COMMON STOCK
There is a lot to be said about securities. Security is an instrument that signifies (1) an ownership position in a corporation (a stock), (2) a creditor relationship with a corporation or governmental body (a bond), or (3) rights to ownership such as those represented by an option, subsription right, and subsription warrant.
People who own stocks and bonds are referred to as investors or, respectively, stockholders (shareholders) and bondholders. In other words a share of stock is a share of a business. When you hold a stock in a corporation you are part owner of the corporation. As a proof of ownership you may ask for a certificate with your name and the number of shares you hold. By law, no one under 21 can buy or sell stock. But minors can own stock if kept in trust for them by an adult. A bond represents a promise by the company or government to pay back a loan plus a certain amount of interest over a definite period of time.
We have said that common stocks are shares of ownership in corporations. A corporation is a separate legal entity that is responsible for its own debts and obligations. The individual owners of the corporation are not liable for the corporation's obligations. This concept, known as limited liability, has made possible the growth of giant corporations. It has allowed millions of stockholders to feel secure in their position as corporate owners. All that they have risked is what they paid for their shares.
A stockholder (owner) of a corporation has certain basic rights in proportion to the number of shares he or she owns. A stockholder has the right to vote for the election of directors, who control the company and appoint management. If the company makes profits and the directors decide to pay part of these profits to shareholders as dividends, a stockholder has a right to receive his proportionate share. And if the corporation is sold or liquidates, he has a right to his proportionate share of the proceeds.
What type of stocks can be found on stock exchanges? The question can be answered in different ways. One way is by industry groupings. There are companies in every