How the stock market works
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4. The Official List
We've talked about companies 'coming to market' and the ways that they come to market.
In fact there are two markets in the London Stock Exchange:
- The Official List
- Alternative Investment Market (AIM)
The Official List is the market for large companies which can meet stringent criteria of financial control, and which can afford to pay for the market's listing requirements.
- Many of the companies are UK-based but there are also companies from India, Korea, South Africa, Australia, Thailand and Malaysia.
- The companies will be followed by lots of analysts in the City, and most of the large pension funds and insurance funds will have substantial sums invested in them.
- Trading volumes will be high, and the shares will have high levels of liquidity.
- The largest of the Official List companies (the FTSE 100 and some of the FTSE 250) will be traded on the Stock Exchange Electronic Trading Service (SETS) rather than through market makers, which theoretically means a narrower bid-offer spread.
The concepts of liquidity and spreads are very important for investors:
- Liquidity means 'How easy is it to buy and sell the shares?' A share that is highly liquid is one which your broker will always be able to buy and sell for you. The sell bit is particularly important. There's no point in owning a share if you can't sell it.
- The 'spread' is the difference between the price at which a market maker offers to buy your shares in Company X (the 'bid price'), and the price at which he offers to sell you shares in Company X (the 'offer price'). The narrower the spread, the better for the investor.
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