What is the Securities and Exchange Commission?

What is the SEC, SEC logo on blue background 2x1
The SEC investigates and prosecutes fraud, insider trading, and other securities-related crimes.

  • The SEC is a government agency that protects investors and ensures fair and efficient capital markets.
  • The SEC ensures investment brokers, stock exchanges, and other market participants comply with US securities laws.
  • It also regulates the disclosures of publicly held companies to help investors make informed decisions.
  • Visit Insider’s Investing Reference library for more stories.

If you’ve ever heard the name Bernie Madoff or Enron, then the Securities and Exchange Commission (SEC) is probably on your radar. But the agency does a lot more than just investigate white-collar crimes and financial scandals.

The SEC also regulates capital markets, ensures investors have a safe and fair playing ground, and holds publicly traded companies to certain reporting and disclosure laws, among other things. Here’s what you need to know about this important agency.

What is the SEC?

The SEC is an independent, public agency of the US government. It’s one of many agencies and wears several hats, but its main goal is to ensure the integrity of capital markets and the fair treatment of American investors.

“The Securities and Exchange Commission is the primary US securities market regulator,” says Robert R. Johnson, chartered financial analyst and professor of finance at Creighton University and author of various investing books, including “Investment Banking for Dummies.” “The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

The agency also investigates and prosecutes fraud, insider trading, and other securities-related crimes. Enron and Bernie Madoff are two of the SEC’s highest-profile cases. Another well-known case is the investigation of Martha Stewart for insider trading in the early 2000s.

What does the SEC do?

The SEC’s overarching goal is to protect US investors by maintaining a fair market. But it doesn’t work directly with investors. Instead, it performs its duty by regulating stock exchanges, as well as those who sell and trade securities, including brokers, investment advisors and asset managers. It also regulates investment companies, including investments such as mutual funds and ETFs, and ensures that companies follow public disclosure and reporting laws.

“The SEC is there to instill confidence,” says Vincent Lupo, managing director of US Tiger Securities, an investment brokerage based in New York. “Whether you’re saving for retirement or trying to attain new financial goals, the SEC is there to enforce the rules and make sure you’re protected. They require public companies and other market participants to disclose financial and other important information so that investors have the complete information to make informed investment decisions – which is especially important in today’s marketplace.”

The SEC performs a variety of functions, including:

  • Protecting investors from financial fraud or manipulation
  • Enforcing securities laws and regulations
  • Regulating the activities of brokers, asset managers and other investment professionals
  • Informing investors with accurate market information, data and scam alerts
  • Monitoring corporate takeover actions
  • Ensuring publicly held companies follow disclosure and financial reporting laws

That last one is important, as all publicly held companies must both register with the SEC and issue certain disclosures and financial reports on a regular basis. According to John Carney, partner at law firm BakerHostetler and former senior counsel for the SEC, it’s also one of the most important SEC duties of all.

“They oversee how public companies report their earnings and how they make their disclosures, because that’s what makes stocks go up and down,” Carney says. “They make sure companies tell the truth about what’s how they’re doing, how much money they’ve made and all their operations.”

How the SEC operates

The SEC is an independent agency within the US government that’s run by a chairman and four commissioners, all of whom are appointed by the US president and confirmed by the Senate. Each commissioner or chairman serves a term of five years.

As you can see above, the SEC has a lot of work to do, so it’s quite a large organization. More than 4,000 employees work for the agency, spread across six divisions and 26 offices. The six divisions include:

  • Corporation finance: This department holds companies to disclosure and reporting laws – both when they go public and on a regular basis. This helps investors make more informed and successful decisions.
  • Examinations: The examinations division works to analyze existing processes and regulations that affect US securities. Its “exams” are used to improve and inform future policy and enforcement practices.
  • Economic and risk analysis: This department handles the SEC’s analytics and data efforts, which inform actions across the rest of the agency.
  • Investment management: This division regulates investment companies, including mutual funds, money market funds and ETFs. As the agency itself explains, “The work of the Division of Investment Management touches the lives of Main Street investors. We oversee mutual funds and other investment products and services that investors may use to help them buy a home, send kids to college or prepare for retirement.”
  • Enforcement: The enforcement division investigates securities violations and prosecutes misconduct through civil penalties and the US court system.
  • Trading and markets: The division of trading and markets regulates securities professionals, stock exchanges and other market participants. It also establishes and maintains market standards to ensure a fair playing ground for all investors.

The SEC’s main headquarters are located in Washington DC, but has regional offices in 11 locations across the U.S., including New York, Chicago, and Los Angeles.

The financial takeaway

If you have a 401K or are invested in the stock market or a mutual fund, then the SEC has a hand in the success of those investments and the information you have to base them on.

The SEC is also there should you need guidance or fall victim to a dishonest broker or investment advisor. As Carney puts it, “People should know that they can call the SEC. The SEC is there to protect them. If you believe an asset manager or a broker stole from you, the SEC can run an investigation, go after them, bring charges and try to get your money back.”

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FINRA: The organization that regulates broker-dealers and protects investors

Finra logo inside oval shape, surrounded by financial icons on blue background
FINRA also provides educational resources and a space for investors to file complaints about brokers if needed.

  • The Financial Industry Regulatory Authority (FINRA) oversees US-based broker-dealer firms, registered brokers, and market dealings.
  • Brokers must be registered with FINRA in order to trade securities with the public.
  • FINRA plays a big role in market security by watching for manipulation or fraud.
  • Visit Insider’s Investing Reference library for more stories.

Financial Industry Regulatory Authority (FINRA) is a private organization authorized by the US government to enforce ethical investment practices among registered brokers. FINRA is largely known for regulation and registration of brokers and brokerage firms.

In reality, FINRA casts a much wider net of responsibility. The organization also monitors daily market functions, handles customer complaints, and maintains a library of educational materials for investors.

“Our whole mission is investor protection and market integrity,” says Gerri Walsh, senior vice president of Investor Education at FINRA.

Learn more about how FINRA protects everyday investors, maintains market integrity, and why its job is so important.

What is FINRA?

FINRA is a self-regulatory organization (SRO) that oversees broker-dealer firms, registered brokers, and market dealings in the US.

Empowered by the Securities and Exchange Commission (SEC), FINRA writes rules that brokers must abide by, evaluates firms’ compliance with those rules, and disciplines brokers that fail to adhere. In order to trade securities with the public, brokers must be registered with FINRA, which administers a rigorous application and examination process. FINRA’s online BrokerCheck tool shows whether a broker is registered with the organization.

FINRA also provides educational resources and a space for investors to file complaints about brokers.

Understanding FINRA

FINRA exists to help the SEC regulate aspects of the securities business, namely brokers and their relationships with consumers.

“Investing is an important part of people’s hard-earned money,” said Harris Kay, a managing partner with Murphy & McGonigle, a law firm specializing in securities law. “They deserve to be in a place that follows the rules.”

FINRA’s services can be divided into a few different, but connected, duties.

  1. Regulate and oversee brokers. Once registered with FINRA, brokers must complete ongoing education requirements over the years. Brokers are subject to periodic audits, which checks whether a firm and its employees are conducting competent and honest business. If a broker is found to be noncompliant, FINRA can bring disciplinary actions against the individual and/or the firm.
  2. Maintain its BrokerCheck database on brokers and firms. You can use FINRA’s BrokerCheck tool to check whether a broker is registered. BrokerCheck also provides background information on a broker or firm, including any history of disciplinary action.
  3. Receive and address customer complaints. When you have an issue with your broker or brokerage firm, you can turn to FINRA to file a complaint, which FINRA will then investigate.
  4. Provide dispute resolution services. When customer complaints evolve into legal action, FINRA provides a forum and lawyers for arbitration and mediation between customers and brokers as an alternative to going to court.
  5. Offer resources and tools for investors. FINRA has a wealth of personal finance and investing articles and calculators available to beginner and advanced investors alike. It even offers free online investing courses. You can give FINRA a toll-free call, to get help in understanding your investments whether you don’t understand something in your statements or you want to know more about a hard sell your broker is trying to make. There’s even a specialty helpline for senior citizens.
  6. Surveille equity markets. FINRA’s technology department plays a strong role in maintaining market integrity by monitoring market transactions and orders every day. Through algorithms and artificial intelligence, FINRA looks for any patterns or signs of market manipulation or fraud. If anything is found, it gets flagged to FINRA’s enforcement team, or sent to other relevant parties like the SEC or the securities exchange itself.

With such a wide responsibility, FINRA is split into 11 departments, including:

  • Board and External Relations includes Investor Education, Government Affairs, and Communications departments.
  • Enforcement takes care of FINRA’S disciplinary actions against brokers.
  • Legal oversees FINRA’s rulemaking and corporate legal functions, and includes Corporate Financing and Dispute Resolution departments.
  • Member Supervision watches over and examines member firms.
  • Market Regulation Transparency Services works with the SEC and exchanges to surveille markets and examine firms to identify any potential market manipulation or fraud. This department also checks that firms remain compliant to federal securities laws.
  • Office of Hearing Officers provides impartial adjudicators to preside over the disciplinary actions brought forward by the Enforcement Department.
  • Technology touches all aspects of technology at FINRA, including the algorithms that surveille markets.

FINRA vs. SEC

FINRA

SEC

Type

Private self-regulatory organization

Government agency

Main Focus

Regulation of brokerage firms and brokers

Regulate individual securities & markets

Other Duties

Administer examinations and registration to brokers and brokerage firms

Take legal action against violations of securities laws

Public Protection

Field and address customer complaints

Provide arbitration forum

Ensures accuracy of information regarding publicly available securities

Due to the magnitude of the securities trading industry, the SEC delegated the regulation of brokers to FINRA as a matter of efficiency. By outsourcing one side of the business, the SEC can maintain better oversight.

One way to see it is that FINRA primarily deals with the human aspect of investing, focusing on the way brokers do business with the public. It ensures that brokers are up to code with its registration process and audits, and assists the public by receiving complaints and offering an arbitration forum.

Meanwhile, the SEC focuses on the bigger picture. The SEC is able to regulate and keep an eye on securities. The SEC also verifies that companies are providing accurate and total information on their publicly available securities, whether on exchanges or over-the-counter. If someone is found in violation of securities laws, the SEC can bring action against them in federal court.

Still, FINRA and the SEC work together in examining broker practices, sharing market surveillance information, and teaming up on enforcement actions.

The financial takeaway

While it may seem like a background player compared to big name and trendy brokerage firms, FINRA should be investors main resource when it comes to securities and investment safety.

FINRA is a great and important resource for anyone who participates in securities markets. It provides a ton of resources, including BrokerCheck, to help investors make smart investment decisions. It also puts brokers and firms through a rigorous registration process to ensure only qualified entities are interacting with the public when it comes to securities.

FINRA can even serve as your personal secondary gut check with its toll-free helpline whenever you need help understanding the investment world.

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What is a short squeeze? Understanding why they happen and how they work

The back of a stock trader watching stocks crash on screen.
A short squeeze afflicts short-sellers, investors who have sold stocks they don’t actually own, in hopes of buying them back later for less money. If the stock rises instead, the strategy goes awry.

  • A short squeeze is when a shorted stock’s price rises and sellers close their position to avoid a loss.
  • Signs of a short squeeze include frequent buying of a high number of shares being sold short.
  • Buy-limit orders and hedging strategies offer short-sellers some protection against a short squeeze.
  • Visit Business Insider’s Investing Reference library for more stories.

A short squeeze is a stock market phenomenon, something that happens to investors and traders who have acted on the assumption that an asset (a stock, usually) is going to fall – and it rises instead. Here’s how it happens.

What is a short squeeze?

Shorting a stock involves borrowing the stock, usually from a broker, and selling it now in hopes of buying it back later for less in order to make a profit.

A short squeeze is when a shorted stock’s price goes up instead of down, forcing the short seller to decide between covering their position by continuing to pay interest on the borrowed shares in hopes the price will go down or exiting their position by buying shares at the new higher price and returning them at a loss.

The downsides of a short squeeze are significant, making shorting a stock a very risky strategy for all but the most experienced traders.

Gamestop short squeeze example

In late January 2021, shares of a company called GameStop (GME) stock, which had been trading around $2.57 per share, suddenly shot up, eventually as high as $500 – when users of the Reddit website subgroup Wall Street Bets began buying up shares.

This was bad news for short-sellers, who had bet the stock would keep falling. Unlike most investors, who want their stocks to appreciate, short-sellers make money when stock prices go down and lose money when they go up.

So when GameStop started gaining, these short-sellers were caught in what’s called a short squeeze. They had borrowed to support their pessimistic investment, and they now had to pay it back – by buying GameStop shares at the higher prices. Or else, hang on – and risk losing even more money.

As of mid-July 2021, GME hovered around $185 per share. While a majority of Markets Insider analysts have a Sell rating on the stock, it held up well on July 19, 2021, during a selloff sparked by an increasing number of cases of the delta COVID variant. Even then GME closed up 2.6%.

How does a short squeeze happen?

Here is how a short squeeze scenario unfolds:

  1. You identify a stock you believe is overvalued and take a short position. Borrowing and selling shares at today’s high price in anticipation the price will go down and you will be able to buy replacement shares at a much lower price.
  2. Instead, something happens causing the price of the stock to start going up. That “something” can be the company issuing a favorable earnings report, some sort of favorable news for its industry – or simply many other investors buying the stock (as happened with GameStop).
  3. You realize you’re unable to buy the stock back at a low price. Instead of sinking, it’s climbing – and it exceeds the price you bought it for. At this point, you must either buy replacement shares at a higher price and pay back your broker at a loss, or buy even more shares than you need – in hopes that selling them for profit will help cover your losses.
  4. All this increased buying causes the stock to keep going up. This forces even more short-sellers like yourself into a tighter vise. You have the same choices as above, only the stakes keep mounting, and so do your potential losses.

Protecting yourself against a short squeeze

There are specific actions you can take to try to protect yourself against a short squeeze or to at least alleviate its grip.

  • Place stop-loss or buy-limit orders on your short positions to curb the damage. For example, if you short a stock at $50 per share, put in a buy-limit order at a certain percentage (5%, 10% or whatever your comfort level is) above that amount. If the shares rise to that price, it’ll automatically trigger a purchase, closing out your position.
  • Hedge your short position with a long position.You can also buy the stock (or an option to buy the stock) to take advantage of rising prices. Yes, you’re betting against yourself, in a way, but at least you lessen the damages of the losses and benefit from the price appreciation.

Short squeeze indicators

Short squeezes are notorious for descending quickly and unpredictably. Still, there are signs a short squeeze may be coming:

  • Substantial amount of buying pressure. If you see a sudden uptick in the overall number of shares bought, this could be a warning sign of a pending short squeeze.
  • High short interest of 20% or above. “Short interest” is the percentage of the total number of outstanding shares held by short-sellers. A high short interest percentage means a large number of all a stock’s outstanding shares are being sold short. The higher the percentage, the more likely a short squeeze may be building.
  • High Short Interest ratio (SIR) or days to cover above 10. SIR is a comparison of short interest to average daily trading volume. It represents the theoretical number of days, given average trading volume, short-sellers would need to exit their positions. The higher this number, the more likely a short squeeze is coming. Both short interest and SIR are on stock quote and screener websites such as FinViz.
  • Relative Strength Index (RSI) below 30. RSI indicates overbought or oversold conditions in the market on a scale of 0 to 100. A stock with a low RSI means it’s oversold – that is, trading at a very low price – and possibly due to increase; a high RSI indicates the stock is extremely overbought – trading at a high price – and possibly due to drop. Any RSI below 30 signals an imminent price rise, which could lead to a short squeeze. A company’s online stock listing usually includes its RSI, often under its Indicators section.

The financial takeaway

A short squeeze is bad news for short sellers and good news for investors going long. The “squeeze” forces short sellers to buy, raising the price of the stock, which causes them to lose money. Investors (buyers) benefit as the stock price goes higher. As more short sellers exit, the price goes higher causing short sellers to lose more and buyers to gain more.

Watch for any of the indicators that a short squeeze may be coming, which includes increased buying pressure, high short interest, days to cover above 10, or an RSI below 30. Most of all, you should understand that the possibility of a short squeeze makes short selling risky. Don’t go there unless you understand and accept that risk.

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What is the FDIC?

Federal Deposit Insurance Corporation (FDIC) seal with dollar signs and question marks surrounding it on a blue background
The FDIC not only insures the money that you store in the bank, but it also regulates financial institutions and resolves failed banks.

  • The Federal Deposit Insurance Corporation, or FDIC, is an independent government agency whose mission is to protect consumers’ money and regulate financial institutions.
  • The FDIC insures up to $250,000 per depositer, per insured bank. But it doesn’t insure all account types.
  • If your bank folds, the FDIC will automatically return your funds back to you so long as the account and funds are insured.
  • Visit Business Insider’s Investing Reference library for more stories.

Picking which bank to store your money is a big decision. There are many options to choose from nowadays, with each financial institution offering various benefits and services. But when you store your money in a bank, you want to make sure it’s safe.

That’s where the FDIC comes in.

To open an account at a FDIC-insured bank means your money is protected, even in the event of a bank failure. “One of the biggest things is to remember that deposit insurance is paid for by the banks and protects depositors in the unlikely event that their bank fails,” says Julianne Breitbeil, a senior media relations specialist at the FDIC. “It’s not personal insurance for miscellaneous losses.”

Here’s what to know about the FDIC, how it insures your money, and how to get your money back should a bank shut down.

What is the FDIC?

The FDIC is an independently run agency of the US government. Its role is to protect consumers’ deposits in the event a financial institution such as a bank or savings association fails. In doing so, the primary goal of the FDIC is to maintain stability in the economy while boosting public confidence in the US financial system.

While the FDIC operates independently from the federal government, the agency is backed by it. In other words: When you deposit money in a FDIC-insured account, the US government guarantees the money will always be accessible.

Founded in 1933 by Congress, the FDIC was established in response to the staggering number of bank failures during the Great Depression. To date, the FDIC monitors more than 3,500 financial institutions, which is more than half of institutions in America’s banking system.

Although the FDIC is the one insuring your money, the funds actually come from the banks that are FDIC-insured. The FDIC will pay insurance to account holders with deposit accounts up to the insured limit.

What does the FDIC do?

The FDIC doesn’t just insure money – it provides a number of functions to keep banks accountable and consumers’ money safe:

  • Protects your money: As mentioned, the FDIC offers desposit insurance and protects your money in the event of a bank failure. Sometimes, another bank might act as the “buyer,” and buy the bank that is faltering. If a bank doesn’t step in and buy the failing bank, the FDIC will handle paying the account holder directly.
  • Regulates financial institutions: It also oversees financial institutions for consumer protection, safety, and soundness. The FDIC also ensures that they’re compliant with consumer protection laws such as the Truth in Savings Act (TISA), the Expedited Funds Availability Act (EFA Act), and the Electronic Fund Transfer Act (EFTA). The FDIC also promotes fair lending statutes and regulations.
  • Resolves failed banks: The FDIC is also the “receiver” of a failed bank, so it sells the bank’s assets and settles its debts, including claims for deposits in excess of the insured limit.
  • Provides educational resources: The FDIC not only protects consumers, it has a mission to educate them, too. From educational programs like Money Smart and robust consumer assistance resources, to podcasts on consumer protection and banking history and the Electronic Deposit Insurance Estimator (EDIE), which can help you determine how coverage applies to you, there is plenty of material for consumers to explore.

What the FDIC does insure

When you have a deposit account at an FDIC-backed bank – such as a savings, checking, a money market account, or certificate of deposit (CD) – your deposits are backed up to at least $250,000 per bank, per person, per account type. You don’t need to sign up for FDIC insurance. If it’s an FDIC-backed bank, you’re automatically covered up to that amount.

The types of accounts the FDIC insures includes:

  • Savings accounts
  • Checking accounts
  • Money market accounts
  • Certificates of deposits (CDs)
  • Cashier’s checks
  • Money orders

What the FDIC doesn’t insure

However, the FDIC doesn’t insure all types of accounts like payment apps, investment accounts, or insurance policies, which includes:

  • Investments in stocks, bonds, or mutual funds
  • Life insurance policies
  • Annuities
  • Safe deposit boxes or their contents
  • Municipal securities
  • Money in apps such as PayPal or Venmo

An exception to PayPal is when you add money to your PayPal account using direct deposit. In this case, that money will be eligible for what’s known as FDIC pass-through insurance.

When you buy cryptocurrency or add money to your Venmo account using remote capture or direct deposit, funds from your Venmo balance also can be backed up by FDIC pass-through insurance.

Although funds in a payment platform such as Venmo or PayPal aren’t typically backed by the FDIC, there might be exceptions, so be sure to comb over the fine print.

How to confirm your bank’s FDIC status

To find out if your financial institution is FDIC-insured, you can either ask a bank representative, look for the FDIC sign at your bank, or you can use the FDIC’s BankFind tool, explains Breitbell.

This tool lets you access specific information about FDIC-backed banks, such as the current operating status, its website, branch locations, and the regulator to reach out to for more information or help.

How to file a claim with the FDIC

In the event of a bank failure, the FDIC will automatically step in and pay insurance to eligible account holders up to the insurance cap. You don’t have to file a claim. This happens automatically, and no action is needed on your part.

Under federal law, the FDIC is required to make these payments as soon as possible. Usually, these payments are made within two business days after a bank shutters, but usually within a business day.

As the bank’s customer, your account gets passed off to an FDIC-insured bank, where you’ll get a new account. The amount in your account will be the same as the insured balance you had at your previous financial institution, which had failed. Otherwise, you’ll receive a check for the balance that was protected.

Note this is only when your financial institution fails. Should you fall victim to identity theft or fraud, that doesn’t fall under what the FDIC protects. It’s a matter that your bank can handle and help with. And if you lost money through an investment account, insurance policy, or payment app, that’s also not something the FDIC handles.

The financial takeaway

The FDIC was created by Congress in 1933 to protect consumers’ money should a bank fail. Should the financial institution where you bank close down, the FDIC will give you back your money.

The FDIC will cover up to $250,000 per person, per account no matter where you do banking. Just make sure to check if your financial institution – and account type – is backed by the FDIC. You can easily check to see if the financial institution you do banking with is FDIC-insured by talking to a bank rep or using the FDIC’s BankFind tool.

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What is a stock exchange? Understanding the marketplace where shares are bought and sold

GettyImages 1215514718
Stock exchanges today are largely virtual as automated electronic trading becomes the norm.

  • A stock exchange is a central marketplace where stocks and other securities are traded, bought, and sold.
  • Exchanges can be either physical or electronic, but electronic exchanges are now the norm.
  • The main purpose of an exchange is to connect buyers and sellers, and to bring stability, transparency, and efficiency to the trading process.
  • Visit Business Insider’s Investing Reference library for more stories

A stock exchange is a place where shares of publicly traded companies are bought and sold in real-time, either physically or electronically.

When you think of buying stock, the first thing to understand is the stock market is actually made up of a network of exchanges. The leading stock exchanges in the US are the New York Stock Exchange (NYSE) and the Nasdaq.

It’s on these regulated exchanges where a lot of action takes place. Stock exchanges are a major part of the market, and understanding how they work can give you a better handle on the inner workings of the stock market at large.

What is a stock exchange?

A stock exchange is a marketplace where you buy stocks, bonds, and other securities. It provides a platform for companies to sell stocks, and for investors to trade those stocks between each other – all within a regulated space that aims to make everything as efficient and transparent as possible.

There are many stock exchanges around the world, each catering to different markets. The NYSE, for example, is one of many stock exchanges in the world, but it’s also the largest by market capitalization, which measures the total value of securities traded there.

Historically, stock exchanges were primarily physical spaces with men standing on a floor yelling buy and sell orders. These days, exchanges are largely virtual with computers matching buyers and sellers together. The Nasdaq, which began operations in 1971, is a prime example of an electronic exchange.

When a company is “listed” on an exchange, that means the company can be traded on it. Listing requirements vary by exchange, but include meeting minimum criteria, such as number of shareholders, earnings, and stock price.

In return for meeting these requirements, companies enjoy the prestige of being on a major stock exchange. Being listed on a popular exchange gives companies visibility within the global marketplace.

How does a stock exchange work?

To understand the basics of how a stock exchange works, it’s helpful to understand the concept of primary and secondary markets.

  • Primary market: In a primary market, companies sell new shares of stocks to the public for the first time, such as an initial public offering (IPO). One of the most important things to note is in a primary market, securities are purchased directly from the issuing company.
  • Secondary market: After the issuance of new securities, the secondary market is where investors buy and sell securities to each other. This is where exchanges come in. The NYSE and the Nasdaq are both secondary markets. Secondary markets are essentially what’s understood as the “stock market.”

While an IPO on the primary market allows private companies to raise large amounts of capital, subsequent trading on the secondary market informs the current value of the stock through supply and demand.

Broadly speaking, a stock exchange can work as either an auction market or a dealer market.

In an auction market, traders bid on the price of a security based on how much they believe in its success, or how badly they want a stake in that company. Typically, buyers strive to get the lowest price possible, so that they can sell for a profit later, while sellers aim to be appraised appropriately.

In a dealer market, multiple dealers, or “market makers,” post the prices at which they’re willing to buy and sell a security, and the differences between the posted bid and ask prices illustrate the cost to investors. Market makers use their own capital to engage in the process and work to provide liquidity, making it quicker and easier to trade.

Trading through a stock exchange tends to be safer than the over-the-counter (OTC) market, where transactions take place directly between two parties rather than being facilitated by an intermediary. Generally, the OTC market is less regulated than a stock exchange and features smaller, riskier companies, like penny stocks.

Functions of a stock exchange

Securities are among the most intensely regulated industries in the US, and the SEC is responsible for regulatory oversight and investor protection.

More broadly, the government agency ensures that listed companies do not partake in fraud by overseeing the registering of new securities and coordinating appropriate filings, like quarterly earnings reports, so that companies remain transparent to potential buyers.

Stock exchanges serve a few key functions to both investors, traders, and listed companies.

  • Transparent securities pricing: Exchanges must ensure that buyers and sellers have access to accurate, up-to-date pricing and order information to make informed investment decisions. They play a major role in providing fair and transparent securities pricing, while also matching buyers and sellers efficiently.
  • Liquidity: Stock exchanges help new companies raise capital while providing instant order access to investors. Exchanges promote market liquidity, allowing for the rapid exchange of stock without significantly affecting its price.
  • Secure transactions: Although being accessible to many market participants is a crucial piece of the puzzle, it’s also important that buyers and sellers are credible and appropriately verified. Stock exchanges ensure that participants meet necessary requirements and follow regulations as directed in order to reduce the risk of default.
  • Investor protection: Exchanges are accessible by both institutional and less experienced investors and must offer protections, like appropriately categorizing stocks by level of risk, to those with limited financial knowledge. This promotes consumer trust and protects less experienced investors from severe financial loss.

Important stock exchange participants

Stock exchanges have quite a few moving parts and everyone involved plays a specific and necessary role. Here’s a breakdown of who’s who:

  • Brokers: Brokers are professionals or firms that act as intermediaries between outside investors, who don’t have access to the inner workings of the exchange, and the market. Brokers represent their clients’ best interests, aiming to buy or sell at the price most beneficial to the investor, and are usually paid on a commission basis.
  • Dealers: Dealers are firms or individuals who execute trades for themselves, rather than for a client or third party, in an effort to maximize their own profits. Dealers make money by selling stocks at higher prices than they initially paid.
  • Market makers: Market makers are dealers who aim to increase the liquidity of the entire exchange, buying and selling a large-volume of stocks to ensure trades occur . This heightened liquidity benefits all parties involved by making trading more efficient.
  • Broker-dealers: As the name suggests, these individuals or firms are a combination of brokers and dealers, serving the interests of both themselves and their clients.

Major stock exchanges

There are many stock changes around the world. Here is a look at a few, along with their most current market cap.

Name Region Market Capitalization
New York Stock Exchange United States $25.6 trillion
NASDAQ United States $19.5 trillion
Shanghai Stock Exchange China $6.9 trillion
Euronext Stock Exchange Netherlands $6.8 trillion
Hong Kong Stock Exchange Hong Kong $6.1 trillion
Tokyo Stock Exchange Japan $5.6 trillion
Shenzhen Stock Exchange China $5 trillion
London Stock Exchange England $4.3 trillion
Toronto Stock Exchange Canada $2.9 trillion
Bombay Stock Exchange India $2.8 trillion

The financial takeaway

Stock exchanges are physical or electronic spaces where shares of publicly traded companies are bought and sold in real-time. These exchanges are highly regulated and generally safer than the OTC market, because regulations make companies less likely to default in paying investors back.

Exchanges simplify the process of finding buyers and provide these investors with peace of mind with regards to a company’s credibility since they regulate the companies listed on the exchange.

What is stock? Learn the basics of investing in a public companyA guide to stock market indexes: What they measure and how they can guide your investingA brokerage account is the first step to becoming an investor, allowing you to buy stocks, bonds, and other securitiesWhat are the hours of the stock market? Here’s when major exchanges around the world open and close

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What is inflation? Why the cost of goods rise over time and what it means for the value of your money

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Inflation, an increase in the costs of goods and services, means that your money has effectively gone down in value.

  • Inflation is the increase in the prices of goods and services in an economy over time.
  • It could also be thought of as a decrease in the value of your money and purchasing power.
  • While a low, steady inflation rate of 2% indicates a healthy economy, high or rapidly changing inflation can become dangerous.
  • Visit Insider’s Investing Reference library for more stories.

Does it feel like a dollar buys less than it used to? You’re not imagining things. “It’s inflation,” people sigh.

You probably have a rough idea of what inflation means. The cost of things is going up.

But what is inflation really, what causes it, and how does it affect your finances? Here’s everything you need to know about this everyday economic term.

What is inflation?

Inflation is an increase in the prices of goods and services in an economy over a period of time.

That means you lose buying power – the same dollar (or whatever currency you use) buys less, and is thus worth less. In other words: When high inflation happens, your money doesn’t go as far as it used to.

Remember that modern money really has no intrinsic value – it’s just paper and ink, or, increasingly, digits on a computer screen. Its value is measured in what or how much it can buy.

While it’s easier to understand inflation by calculating goods and services, it’s typically a broad measure that can be applied across sectors or industries, impacting the entire economy. In fact, one of the primary jobs of the Federal Reserve is to control inflation to an optimum level to encourage spending and investing instead of saving, thereby encouraging economic growth.

How is inflation measured?

Inflation is measured by the inflation rate, which is the percent change in prices from one year to another. The inflation rate can be measured a few different ways:

  • The US Bureau of Labor Statistics measures the inflation rate using the Consumer Price Index (CPI). The CPI measures the total cost of goods and services consumers have purchased over a certain period using a representative basket of goods, based on household surveys. Increases in the cost of that basket indicate inflation, and using a basket accounts for how prices for different goods change at different rates by illustrating more general price changes.
  • In contrast with the CPI, the Producer Price Index (PPI) measures inflation from the producer’s perspective. The PPI is a measure of the average prices producer’s receive for goods and services produced domestically. It’s calculated by dividing the current prices sellers receive for a representative basket of goods by their prices in a specific base year, then multiplying the result by 100.
  • The Bureau of Economic Analysis measures the inflation rate using a third common index, the Personal Consumption Expenditures (PCE). The PCE measures price changes for household goods and services based on GDP data from producers. It’s less specific than the CPI because it bases price estimates on those used in the CPI, but includes estimates from other sources, too. As with both other indices, an increase in the index from one year to another indicates inflation.

The PPI is useful in its ability to forecast consumer spending and demand, but the CPI is the most common measure and tends to have a significant influence on inflation-sensitive price forecasts.

The PCE is less well-known than the CPI, using different calculations to measure consumer spending. It’s based on data from the GDP report and businesses and is generally less volatile than the CPI, because its formula accounts for potential price swings in less stable industries.

Real versus nominal prices

To make meaningful historical cost comparisons – to compare apples to apples, so to speak – economists adjust prices for inflation.

When you hear a price from the past talked about in “real” dollars, that means the price has been adjusted for inflation. When you hear prices from the past talked about in “nominal” dollars, that means it hasn’t been adjusted.

Is inflation good or bad?

Inflation is certainly a problem when it comes to ready cash that isn’t invested or earning anything. Over time, it’ll erode the value of your cash and bank account. It’s also the enemy of anything that pays a fixed rate of interest or return.

But individuals with assets that can appreciate in price, like a home or stocks, may benefit from inflation and sell those assets at a higher price.

In general, economists like inflation to occur at a low, steady rate. It indicates a healthy economy: that goods and services are being produced at a growing rate, and that consumers are buying them in increasing amounts, too. In the US, the Federal Reserve targets an average 2% inflation rate over time.

When inflation starts mounting higher than that or changes quickly, it can become a real problem. It’s a problem because it interferes with how the economy works as currency loses its value quickly and the cost of goods skyrockets. Wages can’t keep up, so people stop buying. Production then stops or slows, and an economy can tumble into recession.

What causes inflation?

There’s a massive economic literature on the causes of inflation and it’s fairly complex. Basically, though, it comes down to supply and demand. Keynesian economists emphasize that it’s demand pressures that are most responsible for inflation in the short term.

  • Demand-pull inflation happens when prices rise from an increase in demand throughout an economy.
  • Cost-push inflation happens when prices rise because of higher production costs or a drop in supply (such as from a natural disaster).

Other analysts cite another cause of inflation: An increase in the money supply – how much cash, or readily available money, there is in circulation. Whenever there’s a plentiful amount of something, that thing tends to be less valuable – cheaper. Indeed, many economists of the monetary school believe this is one of the most important factors in long-term inflation: Too much money sloshing around the supply devalues the currency, and it costs more to buy things.

Types of extreme inflation

Hyperinflation refers to a period of extremely high inflation rates, sometimes as much as price rises over 50% per month for several months. Hyperinflation is usually caused by government deficits and the over-printing of money. For example, hyperinflation occurred during the US Civil War when both the Union and the Confederate states printed money to finance their war efforts.

In a modern case, Venezuela is experiencing hyperinflation, reaching an inflation rate over 800,000% in October 2020.

Stagflation is a rare event in which rising costs and prices are happening at the same time as a stagnant economy – one suffering from high unemployment and weak production. The US experienced stagflation in 1973-4, the result of a rapid increase in oil prices in the midst of low GDP.

How inflation is controlled

Governments can control inflation through their monetary policy. They have three primary levers.

  • Interest rates: Increasing interest rates makes it more expensive to borrow money. So people spend less, reducing demand. As demand drops, so do prices.
  • Bank reserve requirements: Increasing reserve requirements means banks must hold more money in reserve. That gives them less to lend, reducing spending and leading (hopefully) to deflation, a drop in prices.
  • Supply of money: Reducing the money supply reduces inflation. There are several ways governments do this; one example is increasing interest paid on bonds, so more people buy them, giving more money to the government and taking it out of circulation.

How to beat inflation with investments

Investing for inflation means ensuring that your rate of return outpaces the inflation rate. Certain types of assets may beat inflation better than others.

  • Stocks: There are no guarantees with the stock market, but overall and over time, share prices appreciate at a rate that typically exceeds the inflation rate. Most index funds also post returns better than inflation.
  • Inflation-indexed bonds: Most US Treasuries pay the same fixed amount of interest – whose value erodes if inflation is rampant. However, with one type of bond, called Treasury Inflation-Protected Security (TIPS), interest payments rise with inflation (and fall with deflation).
  • Physical assets and commodities: Alternative investments – often, tangible assets like gold, commodities, fine art, or collectibles – do well in inflationary environments. So does real property: Zach Ashburn, president of Reach Strategic Wealth, notes, “returns on investments in real estate have kept up with, or surpassed, rates of inflation for many periods in the past.” That’s because these physical assets, unlike paper ones, have intrinsic value, and are sold and priced in markets outside the conventional financial ones.

More generally, Asher Rogovy, chief investment officer at Magnifina, suggests that it’s best to avoid nominal assets in favor of real assets when inflation’s on the upswing. Real assets, like stocks and real estate, have prices that fluctuate or vary freely. Nominal assets, like CDs and traditional bonds, are priced based on the fixed interest they pay and will lose value in inflationary times.

The financial takeaway

Inflation means costs and prices are rising. When they do, it means that paper money buys less. Low, steady inflation is good for the economy but bad for your savings. Ashburn says, “While having cash available is important for financial security, cash will see its value slowly eaten away by inflation over time.”

To beat inflation, don’t leave your cash under your mattress – or in any place where it’s stagnant. It has to keep earning.

Instead, aim to structure your portfolio so that it provides a rate of return – one that’s hopefully better than, or at least keeps pace with, that of inflation, which is almost always happening. If you do, it means that your investment gains really are making you richer – in real terms.

What are commodities? Tangible, everyday goods you can invest in, to hedge against inflation or sinking stock pricesWhat is real GDP? Understanding the tool economists and governments use to manage the economyWhy the Federal Reserve uses contractionary monetary policy to curb the inflation that accompanies an overheating economyAmericans are the most worried about inflation they’ve been in 7 years

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What is the New York Stock Exchange? Understanding the biggest marketplace for investors in the world

new york stock exchange
The New York Stock Exchange dates back over 200 years.

  • The New York Stock Exchange (NYSE) is the largest stock exchange in the world.
  • It is a marketplace for investors to buy and sell publicly traded stocks and securities.
  • The NYSE uses an auction-based system that connects buyers and sellers either through electronic trading or physical floor trading.
  • Visit Business Insider’s Investing Reference library for more stories.

What do you picture when you hear the words “stock exchange?” If the words invoke images of busy screens and suits on a bustling trading floor, the reality of the New York Stock Exchange (NYSE) isn’t too far off.

The NYSE is the world’s largest and most well-known stock exchange, with a market capitalization of around $24.5 trillion. It’s the trading home to some of the biggest companies, from prestigious blue-chip stocks to young and exciting high-growth stocks.

Understanding the inner workings of the NYSE can provide key foundational knowledge for investors.

What is the New York Stock Exchange?

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The NYSE facilitates the trade of corporate stocks and other securities.

The NYSE – also referred to as the “Big Board” – is the biggest stock exchange worldwide based on the market capitalization of its listed securities. Formerly operated as a private organization, the NYSE is now a publicly traded company owned by Intercontinental Exchange Inc. It’s ticker symbol is NYSE: ICE.

The NYSE’s headquarters is located on Wall Street in New York City, which is home to the exchange’s iconic physical trading floor. The NYSE provides a central marketplace for buyers and sellers to trade shares of stock in public companies – about 1.5 billion shares a day, to be exact.

The exchange lists many of the world’s biggest companies, with sectors including technology, healthcare, energy, financial services, and more. In fact, you’ll find that much of the S&P 500 and Dow Jones Industrial Average traded on the NYSE.

A brief history of the NYSE

The NYSE first opened on May 17, 1792, when a group of 24 stockbrokers signed the Buttonwood Agreement, a document outlining the rules and regulations of securities trading.

In the beginning there were only five listed securities compared to today’s 2,300 counting. The Bank of New York was the first stock listed on the NYSE.

In 1971, the NYSE officially became a not-for-profit corporation, and officially transitioned to a publicly traded company in 2006, which is what it remains today. It’s taken a series of mergers for the NYSE to garner the size and global traction it claims today. Among the most notable was its 2013 purchase by the Intercontinental Exchange Inc. (ICE), an organization that owns and monitors financial and commodity exchanges, in a deal worth $11 billion.

From stock market crashes dating back to 1929, to trading being halted for four days after the 9/11 attacks, the NYSE has faced many notable and historic challenges. In March 2020, the NYSE closed its trading floors and switched to all-electronic trading due to the coronavirus pandemic. To date, the floor remains only partially open.

How does the NYSE work?

General view of atmosphere during the NYSE opening bell ceremony at the New York Stock Exchange on December 15
The trading floor of the NYSE.

The NYSE operates as an auction, with floor brokers setting the “bid” price, or the price they’re willing to purchase a stock, as they buy shares on behalf of their clients. These clients can include banks, broker-dealers, hedge funds, mutual funds, day traders, and some high net-worth individuals.

On the other side of that relationship lies sellers, who submit an “ask” price that typically exceeds the bid price. Sellers are individuals or organizations that offer securities for purchase, like stocks, bonds, or commodities.

Then there are dealers, who serve as an intermediary between brokers and sellers, pocketing the difference between the bid and ask price as compensation for their work.

When a broker executes a selling order, it isn’t complete until a dealer finds another broker to purchase the order. Because of the complexity of the arrangement, not just anyone can trade on the floor of the stock market. All parties involved are required to attain NYSE approval and carry a trading license.

Over time, the NYSE has evolved and modernized its trading environment. Up until about the 1980s, the NYSE relied on the boisterous open outcry system to communicate trade orders through verbal and physical signals such as hand signals and shouts.

Today, electronic trading is the norm on the floor of the NYSE. The “dealer” is a computer that automatically connects buyers with interested sellers, who each get updated information electronically. However, floor traders are still around to facilitate high-volume trades and set pricing live when necessary.

NYSE listing requirements

Before a public company can be listed on the exchange, it must meet a few stringent requirements. In terms of structural standards, all listed companies are required to have a minimum of 400 shareholders and 1.1 million outstanding shares.

Financially, listed companies must have a share price of at least $4, with the market value of its publicly held shares reaching at least $40 million. On top of that, there are also profitability standards that must be met.

Listed companies are required to earn at least $10 million over the past three years and maintain a global market capitalization that meets or exceeds $200 million.

NYSE hours

The NYSE operates daily from 9:30 a.m. to 4:00 p.m. ET, excluding weekends and public holidays, with extended trading hours trading available, too.

The NYSE is well-known for its opening and closing bells, rung at 9:30 a.m. and 4:00 p.m. respectively, to mark the start and end of the trading day.

These used to be rung by floor managers, but the tradition has evolved into executives from companies listed on the exchange coming to ring the bells daily, often in accordance with relevant marketing events or new mergers or acquisitions.

The financial takeaway

The New York Stock Exchange is the world’s largest and most well-known exchange, facilitating between two and six billion trades per day. It operates following a complex auction-based system between three parties: dealers, sellers, and brokers.

Although the NYSE is a world-renowned exchange today, it’s taken time and expansion to earn the reputation it’s built.

What is the Nasdaq? Understanding the global stock exchange that’s home to the fastest-growing, most innovative companiesWhat is OTC? A beginner’s guide to over-the-counter markets, and the risks and rewards of investing outside the major stock exchangesA guide to stock market indexes: What they measure and how they can guide your investingWhat is a stock market correction? How to make sense of sudden drops in the market

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What is a stock market correction? How to make sense of sudden drops in the market

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Market corrections are normal part of investing.

  • A stock market correction is a brief 10%-20% dip in the value of individual stocks or the overall market from its most recent peak.
  • Market corrections occur on a regular basis and are important for preventing artificially inflated stock prices.
  • They are nothing to worry about in most cases, as long as you’re investing long-term.
  • Visit Insider’s Investing Reference library for more stories.

There’s nothing quite like the rush of watching your investments gain value. The same could be said about the moment of panic when you see them start to take a tumble.

However, it’s common to see plenty of ups and downs in the market. And a dip isn’t always necessarily bad.

Many of these dips are stock market corrections, and understanding what that means can help you better manage your portfolio and protect your wealth.

Here’s what you need to know about stock market corrections and why they matter.

What is a stock market correction?

A stock market correction is a brief dip of 10%-20% in the market or individual stock that occurs to correct artificially inflated stock prices and unsustainable growth. They typically last a few months, although some last only a few days.

To help you understand the difference of a few key ways investors describe the market, here’s a brief rundown:

  • Correction: A temporary decline in the market
  • Crash: An unforeseen and sudden drop in stock prices, often signaling wider economic turmoil
  • Bear market: A widespread and prolonged decline of 20% or more in market prices
  • Bull market: When the market condition is on an upward trend for a sustained period of time

A stock market correction can occur for a number of reasons. Many investors chase market trends, so if people are buying a stock because they believe it will rise in value, others are likely to follow suit. This causes the price of that stock to rise. As this happens, some investors who hold that stock may begin to sell in order to turn a profit while the price is high, as will others, causing the stock price to dip temporarily.

This can happen on a larger scale as confidence in the market waxes and wanes. Good news can artificially inflate stock prices, and sometimes the market reaches a point when demand for stocks goes down, forcing investors who want to sell to lower prices.

What are the effects of a market correction?

In these situations, the market dips to correct itself to avoid a market crash. This typically occurs during an overall period of growth.

Historically speaking, most market corrections have not gone beyond a 20% decline, and they often resulted in a bounce back to normalcy or even a bull market – that is, a period of significant growth.

However, it is possible for a market correction to transform into more dire conditions. If a decline surpasses 20% and lasts for a sustained period of time, it transforms into what’s known as a bear market. These periods of market decline are often accompanied by economic stagnation and increasing rates of unemployment. Sometimes they can lead to a recession.

While this describes the effect on the market as a whole, it’s important to note that not all stocks react to a correction equally. High-growth and more volatile stocks tend to be the most reactive, while non-cyclical stocks, such as defensive stocks will be less impacted.

Why do market corrections matter?

Market corrections can impact the performance of your stocks so it’s always a good idea to know when it’s happening.

In general, market corrections impact most long-term investors minimally, as long as it doesn’t evolve into a recession. A brief dip isn’t troubling as long as your portfolio continues on a general upward trend, so time will likely be on your side.

This is even more true if you’ve diversified your portfolio by holding stocks in a wide range of sectors. This includes non-cyclical stocks, also known as defensive stocks, which tend to perform well even under slowed market conditions.

But for short-term investors such as day traders and others attempting to “time the market,” market corrections can present both significant opportunities and obstacles.

On the one hand, a market correction can be a good time to purchase valuable stocks at discounted prices. On the other hand, this is quite risky, as stocks could continue to dip further. Being forced to sell during a dip can be an expensive mistake.

Some investors will attempt to predict market corrections using market analysis and by comparing market indexes to purchase at a low. But it’s difficult to know for sure when it will happen and what the end result will be. For this reason, it’s generally a better idea to keep your portfolio diversified and rely on long-term growth rather than short-term gains.

As you near retirement age, you can rebalance your portfolio regularly and shift your investments toward more stable assets such as bonds. This will protect your portfolio from losing value at a point when you don’t have enough time left for it to recover.

The financial takeaway

Stock market corrections can be scary, but they’re a natural part of how the market behaves. If there’s one rule to follow in investing, it’s not to make impulsive decisions based when the market declines.

Knowing what a stock market correction is and how it works can help you better understand the nature of your investments so you can manage them more efficiently.

Some may use corrections in an attempt to time the market, but you’re more likely to benefit by simply using this knowledge to remain steadfast when your portfolio takes a hit rather than selling at a loss. When it comes to the stock market, having patience and ensuring you have a diverse portfolio during dips is the best way to go.

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