What Are Stock Exchanges?

So what exactly are “Wall Street” and the “New York Stock Exchange“? You have probably heard these words thousands of times, but unless you are a stock owner they might have gone in one ear and out the other.

Stock exchanges are simply organizations that allow people the ability to buy and sell stocks, and a stock is simply a representation of fractional ownership in a company. Think of a stock exchange as a cross between a neighborhood flea market and an auction. The flea market part of the analogy is to show that there is a central gathering place for buyers and sellers of various products, and the auction part is to show that whatever is being bought and sold is done so at the best possible price for all of those in attendance.

Each day at the exchange (flea market) brings a new group of individuals with different expectations and different amounts and quality of products to sell. These differences result in slight prices changes each day.

The stock exchanges, through the use of computers, allow for simultaneous auctions going on for every stock that trades on the exchange every second that the exchanges are open. When the buyers and sellers agree on a price, a trade occurs; when buyers and sellers don’t agree on a price, a trade does not occur, but the computers show what price the buyers are willing to pay and what price the sellers are willing to sell.

The stock exchanges provide a convenient environment that allows buyers to buy and sellers to sell quickly and easily. The super sophistication and speed of computers has only helped all investors and stockbrokers receive up-to-the-second prices and execute trades faster.

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What is a Certificate of Deposit?

With a CD, you agree to deposit a specific amount of money for a fixed period of time (this is called the maturity). In return, your financial institution agrees to pay you interest (usually higher than regular savings accounts) over this period. However, you will have limited opportunities to access these funds so only use CDs for cash you don’t anticipate needing until after your CD matures.

Your bank will offer you many different maturities or terms for CD’s: 3 months, 1 year, 2 years, 5 years, etc. Generally you will find that the longer the term of the CD, the greater the interest rate you earn. However, there is a catch: if you lock your money in at today’s CD low rates, and then rates go up quickly, you’ve missed out on the higher rates.

When you buy a CD you are locked into that interest rate for the life of the CD. If you take out your money before the full term, the bank will charge you a penalty so make sure you understand the term and the penalties involved if you suddenly need the cash and you have to “bust” your CD. Also, consider which direction you think interest rates are heading. If interest rates are very low, don’t lock in a low rate for 5 years! You can’t just bust your CD and then buy a new one with a higher interest rate if you’re current CD hasn’t matured yet.

On the flip side, you are practically guaranteed of getting a fixed rate of interest on your money for the complete term of that CD. So, if rates are high, then it might be wise to lock in the higher rates for longer terms.

The last time there were really high interest rates in the U.S. was the 1980’s when the rates on CD’s were as high as 18%! Now, however, interest rates for CDs are very low: 2% for a one year CD and just 3% for a five year CD.

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