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What is a stock exchange? - Dailyforextrading.net

What is a stock exchange? - Dailyforextrading.net


Being a crucial part of the global economy, stock exchanges are the driver of trading activities and business development. We have all heard about the stock trade but not everyone understands how this whole thing works.


In this comprehensive guide, we will help you embrace this concept and answer all common questions concerning stock exchanges, their classification, how they work and help traders, and so much more.

What is a stock exchange?

The stock exchange is an organization that allows investors and traders to carry out transactions with securities. It provides control over the participants and guarantees fairness and speed of transactions. Each completed transaction is subject to registration.

There are different classifications of exchanges. Basically, they differ by the following characteristics:

  1. Type of goods. In addition to stock exchanges, there are a commodity, cryptocurrency, and fiat currency trading platforms. A stock exchange allows participants to trade securities. On commodity exchanges, they handle real goods (agricultural products, oil, gas, precious metals). There are also the so-called derivatives markets - these are the markets in which industrial financial instruments (futures, options, etc.) are traded.

  2. Form of participation. There are two types of stock exchanges - open and closed. On open exchanges, transactions can be carried out by sellers, exchange members, and buyers. On closed ones, only members of the stock exchange have the right to trade.

  3. Form of participation. There are two types of stock exchanges - open and closed. On open exchanges, transactions can be carried out by sellers, exchange members, and buyers. On closed ones, only members of the stock exchange have the right to trade.

  4. Organization. Most of the existing exchanges are joint-stock companies. The exchanges can also be of a mixed type if the shareholder is the state in addition to private companies.

  5. Role in world trade. There are national and international stock exchanges. National exchanges are relatively small, and they trade securities of small companies that do not meet the requirements of international exchange

History of stock markets

The history of the emergence of the first exchanges refers to European countries, primarily Belgium, the Netherlands, Italy, Great Britain.

The reason for the formation of exchanges is associated with the appearance of the first government bonds, which created the conditions for the functioning of the stock market. To attract additional funds, the state began to issue bonds. These assets were placed in the domestic and foreign markets.

Back in 1531, the first stock exchange appeared in Belgium (Antwerp). Brokers and moneylenders met there to deal with business, government, and even individual debts. The first prototype of the stock exchange dealt exclusively with bills of exchange and bonds since, in the 1500s, there were no real stocks.

In 1602, the Netherlands East India Company officially became the world's first publicly-traded company by listing its shares on the Amsterdam Stock Exchange.

The development of the industrial economy in England in the 17-18th centuries stimulated the creation of the English exchange. At that time, new economic forms began to appear, issuing shares. The London Stock Exchange appeared in 1773 for the sale of securities.

However, since companies were not allowed to issue shares until 1825, there was an extremely limited turnover on the London Stock Exchange. That prevented LSE from becoming the largest stock exchange in the 19th century.

In 1792, the New York Stock Exchange (USA) was founded by 24 brokers who signed the first brokerage agreement. In 1882, the Chicago Stock Exchange appeared in the United States. The exchange began to flourish significantly in the late 1880s when the number of transactions in stocks and bonds increased and brought them more profits.

The Bombay Stock Exchange was the first-ever stock exchange in Asia - it appeared in 1875. Following its lead, the Tokyo Stock Exchange was opened in 1878 to provide Japan with the trade of government bonds that were issued for the samurai, a particular cluster of society. In 1891, American, British, and French businessmen established the Shanghai Stock Exchange.

In Russia, the first exchanges appeared during the reign of Peter I. In 1705, the first Russian stock exchange was established in St. Petersburg. But it was far from being called an efficient market since trading at that time was carried out in small volumes and the credit system was poorly developed. Mostly, the bills of state factories were traded.

How stock exchange works

Many people imagine the stock exchange as a place shown in cinema - a bunch of people screaming and talking by phone. Previously, there was a physical trading floor, and the bidders shouted offers to buy and sell. Now, most of the trading activity is going online.

Each transaction made on the stock exchange goes through several stages:

  1. Application. The buyer can leave a request via the Internet or by phone call. Their buy or sell order enters the electronic system.

  2. Reconciliation. All parameters of the transaction are carefully checked both by the investor and the seller of securities.

 

  1. Clearing (so-called mutual settlements that occur on the exchange). The transaction is being checked, and all the paperwork takes place.

  2. Transaction completion. At the last stage, the securities are directly exchanged for the investor's money.

It is worth noting that there are certain periods of time in the stock market during which it is possible to make purchase and sale transactions. For example, some exchanges do not work on weekends.

Functions of a stock exchange

The exchange maintains fair pricing for the securities market and serves to connect buyers and sellers. All issuers are required to submit their financial statements to the exchange before being admitted to trading.

Transactions take place at a certain time in accordance with the rules established on the exchange. Information about them is in the public domain, you can find it on the website of the corresponding exchange.

As for the stock exchange’s major functions, those include:

  1. Creation of a permanently operating securities market.

  2. Reallocation of funds between countries, different sectors of the economy and industry within one country, as well as between individual organizations.

  3. Fixing the investor's share in a particular stock.

  4. Providing market liquidity and executing trades in exchange for transaction fees.

Important participants on stock exchanges

Every minute, a large number of operations are carried out on the exchange. Several types of participants are involved at once:

  • Investor. An investor can be both a legal entity and an individual. Its purpose is to invest in order to make a profit. To achieve their financial goals, an investor can buy and sell stocks, bonds, mutual funds, futures, or other stock market instruments.

  • Issuer. It issues securities for raising capital. It can be a company, a city, or even a state. The exchange serves as a marketplace for them.

  • Broker. Acts as an intermediary between the issuer and the investor. When making transactions on the market, brokers act exclusively on behalf of the investor. The investor, in turn, has no right to carry out any transactions on the exchange without concluding an agreement with a broker and opening a brokerage account.

  • The registrar maintains a register of all securities. Thus, the company knows who became its shareholder.

  • Custodian stores securities and also keep records of the right transfer when concluding transactions.

  • Regulator. In many cases, it’s a Central Bank. It also issues licenses to control the actions of participants in the securities market. It helps to protect investors from unscrupulous companies.

Primary and Secondary Market

On the primary stock market, the first issued securities of enterprises and the state are sold. This market is dominated by over-the-counter transactions. Securities are bought mainly by credit and financial institutions.

The primary market is interconnected with the secondary market, where market participants buy and sell previously issued securities and their additional reserves.

Stock exchanges play an important role in the capital market: they get capital together without government intervention and channel it into investments that promise a high income. Continue reading with Litefinance.com...

 

 

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