How Stock Exchanges Work - dummies

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

After a company decides to go public, it has some important decisions to make about how to market its shares to the public: Should it register to sell the shares on a stock exchange? If so, which exchange?

In 1792, 24 men signed an agreement to sell securities among themselves, thus creating the New York Stock Exchange (NYSE). Today, the United States has several competing exchanges. The NYSE is home to some of America’s best-known corporations, including General Electric, Exxon, Wal-Mart, America Online, IBM, and Lucent Technologies.

NASDAQ is a competing stock exchange on which the stock of some equally impressive companies is traded, including Microsoft, Cisco Systems, and Intel. Other exchanges available to companies include the NASDAQ SmallCap Market and the American Stock Exchange (AMEX).

Companies don’t directly sell shares on an exchange; rather, they’re permitted to list shares on an exchange, selling them through licensed professionals.

Each stock exchange has its own listing requirements, which may include the following:

  • Levels of pretax income

  • Market value and share

  • Net assets

  • Number of shareholders

  • Share price

In general, requirements for listing on the NASDAQ are less restrictive than those for the NYSE, which is why many newer high-tech companies elect to list with the NASDAQ.

For example, the NYSE requires companies to have either $2.5 million before federal and state income taxes for the most recent year and $2 million pretax for each of the preceding two years or an aggregate of $6.5 million pretax for the three most recent fiscal years. All three of those years must be profitable.

In contrast, the NASDAQ requires only $1 million in pretax income in two of the last three fiscal years. It also offers some alternative standards to pretax income that are easier for emerging companies to meet; these standards are based on factors including assets, revenues, operating history, and market value. As for the NASDAQ SmallCap Market and the AMEX, both have low threshold requirements for listing with them.

When a company elects to list on an exchange, it must register the class of securities under the Securities Exchange Act of 1934, agreeing to make public information available and follow the other requirements of the 1934 Act. In addition to complying with federal securities law, the company may also have to comply with state securities laws, known as blue sky laws, in at least one state in which it operates.