What is Stock Exchange?
stock exchange, also called stock market or in continental Europe bourse, organized market for the sale and purchase of securities such as shares, stocks, and bonds.
In most countries the stock exchange has two important functions. As a ready market for securities, it ensures their liquidity and thus encourages people to channel savings into corporate investment. As a pricing mechanism, it allocates capital among firms by determining prices that reflect the true investment value of a company’s stock.
A stock exchange functions in some ways like a farmers’ market. There, farmers pay the market to have space to sell their goods. Buyers come to the market because they know they'll be able to buy from many farmers selling a lot of different farm goods. Both farmers and buyers benefit from the market. The farmers’ market itself doesn't actually participate in the buying and selling of farm goods; its role is simply to provide the space so that farmers and buyers have a place to meet and trade. Similarly, stock exchanges bring together the companies and current shareholders who want to sell stock, and the investors who want to buy stock from them.
How Does Stock Exchange Work ?
A stock exchange is simply a market where stocks are traded, sold, and bought. Exchanges are generally organized by an institution or association that hosts the market. Those who want to buy or sell stocks or bonds commonly go through a broker, who is licensed to trade on the exchanges.
There are a growing number of online brokers, where you can choose to make many of the trades yourself or opt for a diversified fund that has a makeup designated by what kinds of stocks, bonds, and commodities you want.
Or you can work with a traditional broker or financial advisor, who will advise you on your overall retirement investments and wealth planning. Even they, however, do much of their trading electronically at this point.
If a company is “listed” on an exchange, it means that the company can be traded on that exchange. Not all companies are listed because each exchange regulates which companies meet their requirements. Companies not listed on the exchange are traded “over-the-counter,” or OTC for short.
Even now, you don’t have to buy or sell stocks on an exchange, even if they are listed there. You’re allowed to sell your official stocks on your own, but it isn’t particularly convenient. It was the need for convenience and some rules that led people to form stock exchanges in the first place.
Regulatory authorities set U.S. regulations that stop insider trading and dictate who can legally trade. Buyers and sellers are able to trade at the exchange when it’s open during business hours.
You might think you don’t personally make trades or need to know about stock exchanges, but odds are a portion of your retirement savings are actually in a portfolio of stocks and bonds. In the long run, the market typically offers an average 10% return when inflation is taken into account though obviously, it can go up and down in the short run.
History of Stock Exchange
When people talk stocks, they are usually talking about companies listed on major stock exchanges like the New York Stock Exchange (NYSE) or the Nasdaq. Many of the major American companies are listed on the NYSE, and it can be difficult for investors to imagine a time when the bourse wasn't synonymous with investing and trading stocks. But, of course, it wasn't always this way; there were many steps along the road to our current system of stock exchanges. You may be surprised to learn that the first stock exchange thrived for decades without a single stock being traded.
The Real Merchants of Venice: The moneylenders of Europe filled important gaps left by the larger banks. Moneylenders traded debts between each other; a lender looking to unload a high-risk, high-interest loan might exchange it for a different loan with another lender. These lenders also bought government debt issues. As the natural evolution of their business continued, the lenders began to sell debt issues to the first individual investors.The Venetians were the leaders in the field and the first to start trading securities from other governments.
The First Stock Exchange: Sans the Stock
According to our research, Belgium boasted a stock exchange as far back as 1531 in Antwerp.4 Brokers and moneylenders would meet there to deal with business, government, and even individual debt issues. It is odd to think of a stock exchange that dealt exclusively in promissory notes and bonds, but in the 1500s there were no real stocks. There were many flavors of business-financier partnerships that produced income as stocks do, but there was no official share that changed hands.
Some Facts Various Stock Exchanges Over the world.
Electronic Exchanges
Many exchanges now allow trading electronically. There are no traders and no physical trading activity. Instead, trading takes place on an electronic platform and doesn't require a centralized location where buyers and sellers can meet.
These exchanges are considered more efficient and much faster than traditional exchanges and carry out billions of dollars in trades each day. The Nasdaq is one of the world's leading electronic exchanges.
Electronic Communication Networks (ECNs)
Electronic communication networks (ECNs) are part of an exchange class called alternative trading systems (ATSs). ECNs connect buyers and sellers directly because they allow a direct connection between the two; ECNs bypass market makers.11 Think of them as an alternative means to trade stocks listed on the Nasdaq and, increasingly, other exchanges such as the NYSE or foreign exchanges.
There are several innovative and entrepreneurial ECNs that are generally good for customers because they pose a competitive threat to traditional exchanges, and therefore push down transaction costs. Although some ECNs allow retail investors to trade, ECNs are mostly used by institutional investors, which are firms that invest large sums for other investors, such as pension fund managers.
Examples of ECNs include Nasdaq's Interbank Network Electronic Transfer (INET) and Arca Options, which are overseen by the NYSE.
Electronic communication networks (ECN) enable brokerage firms and traders from various geographical regions of the world to trade outside the normal trading hours of major exchanges.
New York Stock Exchange (NYSE)
The New York Stock Exchange is the world's largest equities exchange.5 The parent company of the New York Stock Exchange is Intercontinental Exchange (ICE) as a result of the merger with the European exchange Euronext in 2007.
Although some of its functions have been transferred to electronic trading platforms, it remains one of the world's leading auction markets, meaning specialists (called "Designated Market Makers") are physically present on its trading floors.6 Each specialist specializes in a particular stock, buying and selling the stock in the auction.
These professionals are under competitive threat by electronic-only exchanges that claim to be more efficient that is, they execute faster trades and exhibit smaller bid-ask spreads by eliminating human intermediaries.
Companies listed on the NYSE have great credibility because they have to meet initial listing requirements and comply with annual maintenance requirements. To keep trading on the exchange, companies must keep their price above $4 per share.7
Investors who trade on the NYSE benefit from a set of minimum protections. Among several of the requirements that the NYSE has enacted,
The following two are especially significant....
Equity incentive plans must receive shareholder approval.
A majority of the board of directors' members must be independent, the compensation committee must be entirely composed of independent directors, and the audit committee must include at least one person who possesses "accounting or related financial management expertise.
Europe
Euronext is Europe's largest stock exchange, and although it has undergone multiple mergers, it was initially formed by the mergers of the Amsterdam, Paris, and Brussels stock exchanges. The London Stock Exchange (LSE) is located in the United Kingdom and is the second-largest exchange in Europe.
The most popular index within the LSE is the Financial Times Stock Exchange (FTSE) 100 Share Index. The “Footsie” contains the top 100 well-established publicly traded companies or blue-chip stocks.
Asia
The TSE has more than 3,800 listed companies, with a combined market capitalization of more than $5.6 trillion.
The Shanghai Stock Exchange (SSE) is the largest in mainland China. Many investments are traded on the exchange, including stocks, bonds, and mutual funds. The Shenzhen Stock Exchange (SZSE) is the second-largest stock exchange operating independently in China.
The Nasdaq
The Nasdaq is sometimes called screen-based because buyers and sellers are only connected by computers over a telecommunications network. Market makers, also known as dealers, carry their own inventory of stock. They stand ready to buy and sell stocks on the Nasdaq and are required to post their bid and ask prices.
The exchange has listing and governance requirements similar to the NYSE. For example, a stock must maintain a $4 minimum price. If a company does not maintain these requirements, it can be delisted to an over-the-counter (OTC) market.12 For example, on the New York Stock Exchange (NYSE), if a security's price closed below $1.00 for 30 consecutive trading days, that exchange would initiate the delisting process.
On average, more than 5 million trades are executed via the Nasdaq on a daily basis.