Today, the largest stock market in the world, the US market continues to be the most attractive. Of course, it has its own characteristics that inevitably influence the behavior of market participants. What is the US stock market and how does it work?
From this article you will learn:
- The US stock market offers a wide range of securities, including treasury securities, federal agency securities, corporate bonds, and stocks of both US and foreign companies listed on US exchanges.
- Key features that contribute to the popularity of the US stock market include its diverse selection of assets, high-level trading services, high liquidity, reliability due to strict listing rules and regulatory oversight, and transparent dissemination of trading information.
- Investors benefit from access to over 5000 stocks, 1000 ADRs, 2000 ETFs, and numerous bonds, along with advanced trading infrastructure that ensures efficient execution and competitive pricing, making the US stock market an attractive destination for investment opportunities.
Structure of the American Stock Market
The US stock market is rightfully considered the largest in the world, with over 40% of all global securities transactions taking place on its platforms. Its capitalization exceeds $40 trillion, of which nearly $10 trillion is held by foreign investors. Moreover, securities of issuers from not only the US but also other countries, from all regions of the world, are traded on it.
The structure of the US stock market differs little from that of other similar markets and includes:
- Primary market, where issuers conduct initial public offerings of securities. Besides issuers, the main players in it are major trading participants: funds, insurance, brokerage, and investment companies, and banks. They can act as bookrunners and underwriters, as well as buyers. Private investors can also access this market through a broker.
- Secondary market, where transactions with freely tradable securities (free-float) are carried out.
- Organized (exchange) market – part of the secondary market, the participants of which conclude transactions on officially registered trading platforms – exchanges. Exchanges act as trading organizers, formulate their rules (such as the volume of a standard lot for each asset, settlement modes, etc.), and guarantee the execution of transactions concluded by market participants. It is on this market that a free auction with securities takes place, in which retail investors also participate. During trading on this market, the real prices of securities are determined.
- Over-the-counter (OTC) market. Another part of the secondary market, where participants conclude transactions without involving trading platforms and, less often, intermediaries (brokers or dealers). The terms of transactions here are determined not by the rules of the platforms but by agreements between participants. It should be noted that most of the significant volume transactions between buyers on the US stock market are concluded off-exchange, which allows avoiding panic and limiting asset volatility in exchange trading.
The OTC market in the US can also be organized if the exchange acts as a participant in agreements between parties to a transaction, taking on the functions of a guarantor of their execution.
Overall, the concept of the US stock market is quite extensive, including:
- A set of assets traded – securities (stocks, bonds, ETFs, etc.);
- Platforms for trading – exchanges and ECNs (electronic communication networks), where over-the-counter transactions are concluded;
- Market participants – investors (institutional, corporate, retail), market makers, brokers, and dealers, etc;
- Trading infrastructure, such as exchange electronic systems, communication channels, information systems, etc.
Exchanges on the US Stock Market
There are over a dozen stock exchanges in the US stock market. However, the main trading platforms of the American securities market are considered to be the NYSE (New York Stock Exchange) and NASDAQ.
NYSE
The New York Stock Exchange is the largest platform in the world for trading securities. The total capitalization of assets listed on it exceeds $23 trillion (almost a quarter of the capitalization of the global stock market), and the volume of transactions concluded on it accounts for almost one-third of the global turnover of securities.
It has the status of an intercontinental exchange – access to trading is provided to companies from many countries from all regions of the world. The number of individual trading participants is over 1300, mainly represented by brokerage firms, with some seats available for lease. The participation fee is around $3 million.
There are more than 4200 tickers traded on the exchange. Among them are the world’s most valuable companies, with many issuers (almost a quarter) registered outside the US. The companies listed are mostly large-cap and fast-growing, and thanks to listing rules, most issuers have significant financial reserves.
Trading sessions start at 09:30 and end at 16:00. Trading takes place from Monday to Friday, except on official holidays in the US. NYSE calculates several families of indices. The most well-known market indicators include the NYSE Composite, S&P 500, and the Dow Jones family.
NASDAQ
NASDAQ – the second-largest exchange in the world by asset capitalization (approximately $12 trillion or almost 11% of the global stock market). The name of the platform is an abbreviation for “National Association of Securities Dealers Automated Quotations.” Initially, the exchange traded shares of high-tech companies, but today the list of represented sectors has expanded to cover almost all sectors of the economy. Currently, the platform hosts shares of nearly 3000 issuers.
The trading schedule coincides with the hours (09:30 – 16:00 NYT) and working days of the NYSE. The main indices calculated by the platform are the NASDAQ Composite and NASDAQ 100.
Securities on the US Stock Market
The US stock market offers participants access to several types of securities:
- Treasury Securities (treasuries). This category includes treasury bills, which are short-term discount obligations with maturities of up to 52 weeks and a face value of $10,000; treasury notes, which are medium-term securities with a face value of $1,000 and maturities ranging from 1 to 10 years; and treasury bonds, which are long-term securities with maturities exceeding 10 years.
- Federal Agencies Securities. These are financial obligations issued by various government agencies.
- State and Local Government Securities.
- Corporate Bonds of US companies.
- Foreign Bonds and Eurobonds. Issued by entities outside the US, the former are quoted in dollars, while the latter are quoted in a foreign currency different from the issuer’s national currency.
- Stocks of US companies (common and preferred).
- Stocks of foreign companies listed on US exchanges.
- American Depositary Receipts (ADRs) for stocks of foreign companies.
- Exchange-Traded Funds (ETFs).
- Real Estate Investment Trusts (REITs).
Why the US Stock Market is So Popular?
The distinguishing features of the US stock market that make it so attractive to investors include:
- Diverse range of assets. With over 5000 stocks, about 1000 ADRs, 2000 ETFs, and numerous bonds, the US stock market offers securities from many major companies across various countries.
- High-level trading services. All exchange platforms are equipped with powerful server hardware and utilize high-speed communication channels. If a security is traded on multiple exchanges under the same ticker symbol, investor orders are broadcasted to all platforms simultaneously, significantly reducing execution time and virtually guaranteeing the best price.
- High liquidity. Statistics show that on average, 5% to 10% of registered securities are traded during the day (the higher figure applies to days of major index rebalancing and options expirations).
- Listing rules typically prevent the placement of blatantly weak assets. Additional investment security guarantees are provided by strict regulatory rules and numerous insurance offerings.
- Transparent and detailed information. Trading data from exchanges is disseminated to major information agencies such as Bloomberg and Reuters approximately every 5 seconds.