What is a Stock Exchange and how does it work? The stock market is an essential part of the secondary capital market. Stock exchange is an organized market on which authorized entities carry out the transactions of purchase and sale of securities. The stock market is a market with a very high degree of formalization. Specified precisely is in fact the market itself, a market participant, the object of the transaction (security), price (exchange) transactions and, finally, the manner of its conclusion. Taking this into account, one can recognize the essence of the stock exchange as follows:
Stock Exchange is an institutionalized form of the capital market, where certain entities are transacting with a specific value in a particular mode. In the traditional meaning of the stock exchange it should be added, “at a certain time”, thus paying attention to the regularity of meetings of buyers and sellers, as well as certain timeframe of trade exchange.
The Stock Market has a fundamental importance in ensuring the liquidity of the securities. Allows quick and cheap (low transaction costs) monetizing (liquefaction) of the securities held. Thus provides a rapid circulation of capital. This, in turn, facilitates new issues of securities.
Functions of general economic stock exchanges are the same as the secondary market, because the stock market is a part of it . Often, the stock market is identified with the secondary market. This is not totally true because the stock market is its most popular part. The secondary market is also the trading of securities outside the stock exchange. In some countries this exchange trading is developed better, in others worse. Market is the cornerstone of secondary market securities and all capital market.
A significant and best part of the securities is traded on the stock exchange. Stock prices, which tend to be easily influenced by supply and demand, affect the prices of securities outside the stock exchange (eg OTC market).
The stock market is considered a barometer of the overall economy. Valuation of securities of the issuer, made in the stock market during the trading session, is a reflection of the condition of the issuer (company). So the stock market is an indicator of the effectiveness and strength of the economy. It helps to estimate the economic situation.
The stock trading system is not only used on the stock exchanges. The stock market is an important market in the formal-centralized market economy.
– Formal, because the transactions are concluded in the prescribed form, and items of transactions are standardized, that is homogeneous in their groups (eg. shares of Philips, shares of Saxobank, etc.). Goods are standardized qualitatively, quantitatively and costly.
– Centralized, because it concentrates supply and demand of values. There is an opinion that the stock exchange is a stock exchange only when the transactions are of continuous trading, which are carried out on a regular basis taking into account the liquid exchange system. Not all stock exchanges operate in this manner and at full range. Stock market is a market driven by customer’s orders.
Legal status of the stock exchanges in different countries is different. However, it does not change the economic importance of the stock exchanges. In smooth functioning of the stock exchange are important:
– Rules of the stock exchange regulating operation mode and organization of the stock exchange as well as carrying out transactions on it,
– Organs of stock exchange – management and other collegial entities supervising the activities of stock exchanges,
– Material equipment of stock exchange, ie the stock exchange infrastructure.
Regulations define all relevant issues related to the functioning of the stock exchange and the mode of carrying out transactions. Regulations establishes, for instance, operating range of the stock exchange, determines the admission of securities for trading, responsibilities and powers of stock exchange government and other stock exchange organs, the transaction and dispute resolution modes (arbitration courts, courts of honor), mode of admission of participants to stock exchange operations, etc. In other words, the rules create a legal and organizational framework of stock exchanges. Therefore, you can conclude that regulations and statutes of stock exchange are kind of stock exchange’s “constitution”.
An important place of stock exchange is a spacious hall (sometimes several). This hall is known colloquially as “floor”. This is where transactions are listed and where the trade participants meet. Around the hall or in a prominent place are exchange rate tables on which transaction rates and other details of the transaction are displayed. Also displayed is a stock index – a synthetic indicator of stock market turnover. Around the hall can be placed boxes of stock exchange participants. In such areas traders have secured means of communication with the companies and other stock exchanges. Hence they come out with orders onto the “floor” and trade. The most famous stock exchanges are those located in: London, New York and Tokio.