How markets & exchanges work

A company issues new shares of stock or new bonds in order to raise capital to maintain or expand its business.

The investors who buy these securities when they’re issued may hold them or sell them — either immediately or at some point in the future — on what’s known as the open or secondary market. Those sales occur on exchanges, such as the New York Stock Exchange (NYSE), and electronic securities markets, such as the NASDAQ Stock Market. The pace of the trading, the prices investors pay to buy, and the gains that they realize when they sell all reflect supply and demand within these exchanges and markets.

The issuing companies aren’t usually involved in secondary market transactions and don’t share in any profit investors may realize by selling securities for more than their purchase price. The exception is that companies do have the right to buy up shares of their own stock and to call, or redeem, certain bonds.

Investment banks
When a company wants to issue new stocks or bonds, it usually works with an investment bank. The bank helps determine the interest rate a bond must offer to be attractive to investors, and it sets the initial stock price at the amount it thinks investors will pay. Then the bank buys up the entire issue, often in collaboration with other banks, and makes the securities available to brokerage firms, who sell them to investors.