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There are two major types of exchanges. One exchange is a physical location where investment transactions are carried out on a trading floor. This type of exchange is similar to an auction used in stock exchanges and commodity exchanges where stock traders enter "verbal" bids and offers simultaneously. The other exchange is “virtual” because it uses computer networks to exchange stocks (bids and offers) electronically.
The stock market is based on an auction-type system where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.
There are a number of available stocks. Some of them include:
Common and preferred stocks
Common stocks are securities that are purchased or somehow acquired which represents a share of ownership in a corporation. Shareholders who own common stock are at the bottom of the prioritized ownership structure ladder. If the company is liquidated (through sale or other means), common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debt-holders have been paid in full. Common stocks, however, have the right to vote on members of the board of directors.
Preferred stocks are ownership securities in a corporation that have a higher claim on company’s assets and earnings. Dividends for preferred shareholders are paid out before dividends to common stockholders. These shareholders, however, usually do not have voting rights as compared with common shareholders.
Large cap, mid cap and small cap stocks
Large cap stocks are publicly traded companies with a market capitalization (market value) that is greater than $10 billion. Examples of large cap companies are Wal-Mart, Microsoft and General Electric. The value of any company is calculated by multiplying the number of a company’s outstanding shares by its stock price. Mid cap stocks are companies with a market capitalization of between $2 and $10 billion. They are called mid cap because they are between large and small cap companies. Finally, small cap stocks are companies with a value of less than $2 billion.
Growth and value stocks
Growth stocks, as the name connotes, are those that experience an above average return and continued growth that exceeds the general market. Generally, the evaluative period exceeds one year in length. Those who invest in growth stock are prepared to take on an added level of risk to derive a higher return on their investment. These companies, typically, do not pay dividend because they would rather investment their earnings into continued increases in customers and market share.
Value stocks, on the other hand, are those that tend to trade at a lower price to the amount of earnings, dividends, sales and other factors. The stocks have a value-orientation because they are undervalued by traders (those who are interested in incremental financial gains due to the ebbs and flows of the stock market). Shareholders who invest in these stocks usually believe that markets aren’t always efficient and that it's possible to find companies trading for less than they are worth.