Earlier in this chapter it was remarked that when security issues of great size are to be floated, it is generally advisable to have them at once listed on the stock exchange and to effect at least a portion of the sales through stock exchange transactions. One advantage is that the ready marketability of the security is at once established, thus making it easier to sell it at a high price. Another even more direct advantage is the fact that considerable quantities may be purchased through the exchange by people who are not listed as customers of any of the bond houses which float the issue, or who prefer to buy and sell through the exchange rather than "over the counter".

Inasmuch as a full description of stock exchange methods and of the factors which affect stock exchange quotations would require more space than is here available, it is not feasible to do more than to give a brief review of the main facts.

Fundamentally an exchange is simply a meeting place for people who wish to buy and sell securities. In the eighteenth century the London coffee houses grew to be the natural centers for business dealings, and gradually the custom arose of buying and selling through agents, who made it a point to meet for this purpose. It was a natural step forward to form an organization of these agents or brokers and to establish definite hours and fixed rules to govern the trading, and when that step was taken the stock exchange came into existence. Much the same series of stages has marked the evolution of exchanges in all the other principal commercial cities of the world. There are important exchanges today not only in London, New York, Paris, and Berlin, but in Antwerp, Rotterdam, Vienna, Petrograd, Buenos Aires, Rio de Janeiro, Valparaiso, and numerous other cities. Within the United States the chief exchanges outside of New York, are in Boston, Philadelphia, Baltimore, Cleveland, Cincinnati, Chicago, New Orleans, and San Francisco. This is by no means a complete list. Even some of the smaller cities, such as Rochester, New York, have stock exchanges of some importance.

All the exchanges are organized on the same general plan. They are non-stock corporations, similar in their essential constitution to clubs. Members are admitted on payment of dues, provided a membership or "seat" has been purchased from some member who wishes to retire. The mere fact that membership has been purchased, however, is not sufficient in itself to guarantee admission. The membership committee may, for any reason that it sees fit, decline to accept the applicant.

Seats on the leading stock exchanges frequently sell at very high figures. Their value is apt to fluctuate a great deal from time to time, depending upon the amount and profitableness of the business which is being handled by the exchange. A price of $70,000 to $80,000 for a seat on the New York Stock Exchange is not uncommon, though within recent years as little as $30,000 has been paid.

The brokers who hold membership on an exchange are required to charge standard commissions for buying and selling. On the New York Stock Exchange the brokerage on each transfer of a security is 1/8 % of the par value, or $1.25 per thousand dollars; thus the normal difference between the buying price and the selling price of a stock exchange security is 1/4%. On the London Exchange, brokers' commissions are determined by individual firms and have not been so definitely standardized. The buying and selling of securities often reach an enormous volume; for instance, million-share days on the New York Stock Exchange are by no means uncommon. Naturally, much of the buying and selling is at once offset by a corresponding resale or repurchase. A certain portion of the brokers are known as "scalpers" and make it their sole business to take advantage of quick fluctuations in prices. A broker of this type may buy 1,000 shares with the full intention of reselling within a few minutes or, at any rate, before the close of the day. He is satisfied if he makes a profit of 1/8 to 1/4 on the transaction.

Other members of the Stock Exchange seldom or never appear on the floor, but operate entirely through their fellow brokers. The advantage to them of membership lies in the fact that the regular commission on transactions for fellow brokers is reduced to the very low figure of $2 per hundred shares. By far the great majority of the brokers do little or no buying and selling on their own account, but are satisfied with handling the orders given them by their customers.

On the London Stock Exchange there are two classes of traders, known as "jobbers" and "brokers." The broker deals with outside customers and turns over the actual filling of the order to the jobber. On the New York Stock Exchange the transactions of every day are "cleared" at the end of the day. That is to say, purchases and sales of the same security are checked off against each other so that there need not take place the vast amount of handing certificates from hand to hand which would take place if every sale were to be accompanied by an actual delivery. After purchases and sales have been checked, there remains only a comparatively small residue of actual deliveries required in order to close the day's transactions. On the London Stock Exchange the period of settlement comes only once a fortnight. Three days are allowed for checking up and turning in records of purchases and sales, for giving to brokers the names of the people to whom their certificates are to be transferred, and for making payment and accepting delivery. This complex machinery is required partly because of the English practice of registering the names of all holders of securities. Securities to bearer or securities under the American plan of requiring only indorsements in blank, can be much more easily handled.