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Summary of the U.S. Stock Market

Introduction

When we talk about the stock market, we are referring to securities traded on one of the three major U.S. stock exchanges (the NASDAQ, the New York Stock Exchange, or the Cboe), or on IEX, the Investors Exchange, a startup exchange with a small market share (see our overview of U.S. stock exchanges). When people think about the stock market, they primarily think about the common stocks of companies like Apple or Amazon. Although common stocks make up the bulk of the stock market, there are actually twelve different types of securities traded on U.S. stock exchanges:

• Common stocks of U.S. companies
• Common stocks of international companies via American Depository Receipts, or "ADRs"
• Common stocks of international companies that are directly traded in the U.S.
• Preferred stocks
• Limited partnership shares of master limited partnerships, or "MLPs"
• Royalty trusts
• Publicly traded debt that we label as "exchange traded debt"
• Warrants to purchase common stocks
• Units (one or more securities that trade together in a bundle)
• Rights
• Options to buy or sell common stocks
• Futures contracts

In addition, there are five different kinds of investment funds that are publicly traded on U.S. stock exchanges:

• Exchange traded funds, or "ETFs"
• Exchange traded notes issued by a bank, or "ETNs"
• Closed-end investment funds
• Business development companies, or "BDCs"
• NextShares

U.S. Common Stocks

The "heart" of the stock market is U.S. common stocks like Apple, Microsoft and Amazon. These are considered to be "large cap" stocks because they have a a total market capitalization greater than $10 billion. The 500 or so large cap stocks on the U.S. stock market are mostly well known names of large American corporations like Wells Fargo, Coca Cola, GE and Home Depot. These large cap stocks dominate the stock market in terms of total market cap.

If you are new to investing, the term "market cap" or "market capitalization" is simply the total value of the outstanding securities. So if a company has 1,000,000 outstanding shares of common stock, and those shares are trading on a stock exchange at a price of $10.25 per share, then that company has a market cap of $10,250,000.

A "micro cap" stock is any stock with a market capitalization of less than $300 million. Even though there are 1,000+ micro cap stocks traded on U.S. stock exchanges, they are so small and thinly traded that most large investors and institutions pay very little attention to them. And most large investment funds (mutual funds, closed-end funds, and ETFs) also tend to ignore micro cap stocks.

You can read more in our article introduction to U.S. common stocks.

ADRs

An American Depository Receipt, or "ADR", is a special type of security that represents ownership in the common stock of a foreign company. ADRs are issued by a large U.S. investment bank, and are traded on a U.S. stock exchange in U.S. dollars. Because the U.S. stock market is the largest in the world, many foreign companies want to list their shares on the U.S. market. They can either directly list their shares on a U.S. stock exchange, or they can work with a U.S. investment bank to have that bank issue an ADR. The ADR represents an ownership share in the company's common stock. The actual common stock may be traded somewhere in the world on a stock exchange, or the common stock may be "privately held" (i.e. not traded anywhere else but in the U.S. in the form of an ADR). You can read more in our article what is an ADR?

International common stocks

Although ADRs are the most common way for a foreign company to have their shares traded on a U.S. stock exchange, they can also directly list their shares on a U.S. stock exchange, just like they were a U.S. company. Here is a summary of the international common stocks that are directly traded on U.S. stock exchanges.

Note that a significant portion of the above stocks are Canadian companies. Many of the stocks traded on the Toronto Stock Exchange are "cross-listed" on a U.S. stock exchange. Cross-listing means that the same stock simultaneously trades on two different stock exchanges.

MLPs

A "master limited partnership" is a partnership that has limited partnership shares traded on a stock exchange. MLPs are unique for several reasons. First of all, MLPs are pass-thru entities that don't pay tax at a corporate level. So if you own shares in an MLP, you are considered a limited partner in a partnership, and you recognize gains or losses every year on your share of the partnership's income or loss. Second, the pass-thru structure of an MLP means that an MLP must distribute any income it makes to the limited partners, which means that an MLP typically has a high dividend rate. Finally, MLPs are mostly in the energy business. You can read more in our article what is a MLP?

Preferred stocks

Preferred stocks are unique because a preferred stock has a claim on a company's assets, in priority to any claims of the common stock holders. But the claims of a preferred stock are secondary to any claims of the company's debt or bond holders. Preferred stocks are issued with a set dividend rate, and often can be redeemed by the company within certain conditions spelled out when the stock is issued. A preferred stock is a "hybrid" security that sort of acts like a common stock and sort of acts like a bond. You can read more in our article what is a preferred stock?

Exchange traded debt

Most fixed income investments like bonds are traded "over the counter" or OTC rather than on an exchange. However, there are a few companies that have borrowed money by issuing "notes" that are publicly traded on a stock exchange. We call this debt "exchange traded debt". Occasionally, closed end funds and BDCs will also issue publicly traded notes as part of their ongoing effort to use structural leverage to enhance the returns of their common shareholders. Notes are a type of debt (i.e. a loan), so an investor who owns shares in a note receives interest payments under the terms of the note and becomes a creditor of the issuing entity. There aren't a lot of publicly traded notes, probably because of the expenses associated with issuing a note that can be publicly traded on an exchange. You can read more in our article what is exchange traded debt?

Warrants

A warrant is a security that confers the right, but not the obligation, to buy another security at a certain price before expiration. Warrants typically give you the right to purchase the common stock of a company. The price at which the underlying security can be bought is referred to as the exercise price or strike price. The warrant can be exercised at any time on or before the expiration date. Warrants are generally issued by the company itself. Unlike options, warrants are dilutive: when an investor exercises a warrant, the investor receives newly issued stock, rather than already-outstanding stock. Warrants tend to have much longer periods between issue and expiration than options - typically years rather than months. You can read more in our article what is a warrant?

Rights

A right is a security that entitles the holder thereof to receive future benefits if certain specified events happen. Each right is unique. Some rights entitle the holder to receive additional common stock shares of a company when certain conditions are met, such as upon consummation of a business combination. Other rights entitle the holder to receive a cash payment if the company meets a key milestone. It is sometimes difficult to get good information on rights, and we admit that our information on rights is not that good. Fortunately, there are not that many of them.

Units

Units are securities that consist of a bundle of securities related to the same issuer that trade together, with one symbol and one price. Typically, a unit will consist of a certain number of shares of common stock of the issuer plus a certain number of warrants to purchase more shares of the issuer. Some units also bundle together common stock, warrants and rights. For whatever reason, units have become a security that is almost exclusively offered by special purpose acquisition companies, or "SPACs". A SPAC is a newly formed corporation with no operations that goes public to raise money so that it can eventually merge with a private company that wants to become a public company. Most SPACs go public by first issuing units rather than directly issuing common stock. Most SPAC units consist of a share of common stock and a warrant. Within a few months after their IPO, SPACs set it up so that their stocks and warrants are separately traded, but not initially. You can read more in our article what is a unit?

Royalty trusts

A royalty trust is a type of corporation created to act as the owner of the mineral rights to wells, mines and similar properties. It exists only to pass income generated from the sale of the property's assets (gold, oil, etc.) to shareholders. No income tax is paid at the corporate level as long as the bulk of income (at least 90%) is passed-through to shareholders in the form of distributions or dividends. Royalty trusts are most common in the U.S. and Canada. Canadian law places fewer restrictions on royalty trusts than American law, so royalty trusts are especially popular in Canada. Because they are pass through securities, royalty trusts typically have a higher than average dividend yield.

Closed-end funds

Closed-end funds are investment funds that are publicly traded on a stock exchange. You buy and sell shares of these funds through your broker, just like you would a stock. Closed-end funds are unique because they are allowed to use "structural leverage" - they can borrow at a fund level and they can issue preferred stock. The two most popular investment fund types in America (mutual funds and exchange traded funds) cannot use structural leverage. You can read more in our article what is a closed-end fund?

BDCs

A business development company, or "BDC" is a closed-end fund that has elected to be treated as a BDC under the U.S. tax code . You buy and sell shares of these funds through your broker, just like you would a stock. BDCs are unique because they focus on making equity and debt investments in private companies, similar to a venture capital fund. Since they are a closed-end fund, BDCs can use structural leverage (borrow at a fund level and issue preferred stock). You can read more in our article what is a BDC?.

ETFs

Exchange traded funds, or "ETFs", are investment funds that are publicly traded on a stock exchange. You buy and sell shares of these funds through your broker, just like you would a stock. ETFs are unique for several reasons, but primarily because most ETFs do not have a portfolio manager who judgmentally decides what investments to buy. Instead, most ETFs are "index funds" - they automatically buy whatever investments are included in the stock market index that the ETF has been setup to track. This is in sharp contrast to most mutual funds that are "actively managed" by a portfolio manager. You can read more in our article what is an ETF?

ETNs

Exchange traded notes, or "ETNs", are notes (i.e. debt) issued by a large bank like UBS Bank or Barclays Bank that are publicly traded on a stock exchange. You buy and sell shares of ETNs through your broker, just like you would a stock. ETNs are a special kind of debt issued by the bank, in that the "returns" on the debt are tied to a stock market index. Once the ETN is issued, the bank generally pays an investor "interest" based on the interest or dividends associated with the stocks or bonds in the index that the ETN is tied to. The bank ultimately "settles" the debt by redeeming the ETNs at a settlement price that is tied to the performance of the stocks or bonds in the index. You can read more in our article what is an ETN?

NextShares

A NextShares is a new type of investment fund that is traded on a stock exchange that was invented by Eaton Vance. It is a hybrid type of investment fund with elements of a closed-end fund and elements of an ETF. You can read more in our article what is a NextShares?

What is not traded on a stock exchange?

In addition to the stocks traded on U.S. stock exchanges, there are 10,000+ more stocks that are traded "over the counter", or OTC. These are usually stocks of very small companies that for whatever reason do not want to go to the trouble of having their stock trade on an exchange. There are also hundreds of ADRs of foreign corporations that trade OTC, including the ADRs of some very large foreign corporations. This can happen when a foreign corporation wants to experiment with the ADR process and test how much interest there is from U.S. investors, as it is much easier to list an ADR OTC rather than on a stock exchange. You can read more in our article about OTC stocks.

Bonds and other types of fixed income securities like bank loans are also almost always traded "over-the-counter" or OTC. Because of the complexity of bonds, with each bond issuance containing a different set of terms, it is more difficult to trade bonds on a national exchange. Most bonds are also thinly traded, which also makes it more difficult to trade them on an exchange. Keep in mind that many bond investors will buy a bond when it is issued and then hold it until maturity, which means that the bond market will never be as actively traded as the stock market. So bonds are almost always traded OTC. The exchange traded debt shown above that is traded on a U.S. stock exchange is a small part of the U.S. bond market. You can read more in our article summary of the U.S. bond market.

Mutual funds are the most common investment fund in America, but they are not traded on a stock exchange. Instead, investors buy and sell shares in a mutual fund by directly interacting with the mutual fund company. Most online stock brokers will also buy and sell shares of a mutual fund on behalf of an investor. You can read more in our article what is a mutual fund?

Unit investment trusts or UITs are another investment fund type in America that are not traded on a stock exchange. Instead, investors buy and sell shares in a UIT by directly interacting with the mutual fund company. Most online stock brokers will also buy and sell shares of a UIT on behalf of an investor. You can read more in our article what is a unit investment trust?