Don’t Be Scared of the Stock Exchange

The stock exchange is nothing more than a marketplace where securities, commodities, derivatives and other financial instruments are traded among the participants.  Its purpose is to ensure that a fair and orderly transaction takes place and allows companies, institutions and even governments a mechanism where they can buy and sell investments to the public.

Major Stock Exchanges in the World

The exchanges can be a physical location below is a listing of the major exchanges:

1. New York Stock Exchange
2. NASDAQ
3. Tokyo Stock Exchange
4. London Stock Exchange
5. Euronext
6. Hong Kong Stock Exchange
7. Shanghai Stock Exchange
8. Toronto Stock Exchange
9. Frankfurt Stock Exchange
10. Australian Securities Exchange
11. Bombay Stock Exchange
12. National Stock Exchange of India
13. SIX Swiss Exchange
14. BM&F Bovespa
15. Korea Exchange
16. Shenzhen Stock Exchange
17. BME Spanish Exchange
18. JSE Limited
19. Moscow Exchange
20. Singapore Exchange
21. Taiwan Stock Exchange

How to Buy and Sell Stocks in the Stock Market

The general public cannot walk into the above listed exchanges and start buying and selling stocks of the various companies right on the floor. Instead, one has to work through a broker.  The brokers use a simple order routing mechanism to make the process efficient.

Old School Way

Basically the transaction works like this…  Let’s say you want to buy 100 shares of IBM. So you would contact your broker and let him know what price you are willing to pay.  The broker then would have his representative at the exchange negotiate the deal on your behalf at your stated price.  Once the deal is closed the broker will communicate back to you and then you are charged a commission for completing your order.

Electronically

Back in time this was a physical process and can still be today but most of the world wide transactions take place electronically on a virtual exchange.   Instead of a crowd standing around the trading pit flashing signals, most traders do transactions using computers executing the order in milliseconds.  Not only is the speed of the transaction much faster, the orders and deals are more accurate.

Roles of the Stock Exchange

Another role of the stock exchange is to provide the requirements and rules associated with the transaction such as reporting and audited financial reports.

The role of the stock exchange varies by exchange but may include;  Raising capital for business by going public, creating limited partnerships, finding venture capital and creating corporate partners.  The exchanges can also facilitate company growth, help with profit sharing and corporate governance.  They can create investment opportunities for small investors, raise capital for government development projects and provide a barometer on the economy.

Another role of the exchange outside of investments is to provide a mechanism for speculation and hedging.  Speculation is the buying or selling of shares or commodities in order to profit for a projected move.

Stock Exchange Ownership

Originally most stock exchanges were mutual organizations owned by its member stock brokers. Recently, however, the trend has been to have the owners sell their shares in an initial public offering, then create a corporation that is listed on the exchange itself which can be owned by the general public.

There are other types of exchanges which are closely related to the stock exchange such as the futures exchanges where futures and options contracts are traded.  The Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) are two such groups where trading of commodities and stock options can take place.

In order to trade a security on any given exchange the company or commodity must be listed there.  Like we mentioned earlier, although there is a central location for the record keeping, etc., that is a physical location. The actual trades are more than likely carried out electronically via a virtual computer network to increase speed and accuracy.  As an individual you can tap into this electronic network via your broker and an internet connection and place your own trades with the exchanges.  With this development, the barriers to entry have diminished to the point that many traders and investors are now trading from home.