Stock Exchange today is one of the most important tools of modern finance. On the stock exchange all securities transactions are concluded – ensuring stability, determining the value and enabling all stakeholders to receive relevant information about the securities. Such securities are traded in the stock market:
- Shares of enterprises of all patterns of ownership
- Federal and municipal government bonds
- Derivatives (derivative securities)
Mention of the first stock exchanges dates back to the 16th century – prototypes of modern exchanges worked in the Netherlands and the UK. The emergence of stock markets is directly connected with the creation of the first joint-stock societies of those times – Levant, Moscow, East India Companies. The emergence of such large companies gave rise to the need to create institutions, where sale and purchase of shares will be held, as well as the legal registration of transactions.
The stock exchanges of the New World appeared in 1792 – the first was the New York Stock Exchange (NYSE), which capitalization now exceeds the mark of $ 28 bln.
What securities can circulate on the stock exchange?
On the stock market any securities cannot circulate for nothing – listing procedure is mandatory. Listing – checking for compliance of the security with certain standards and requirements. Listing procedure varies on different stock exchanges, however, there are general eligibility criteria:
- Degree of capitalization of securities
- Legal status
- The significance of the issuer for the economy
To assess the state of the securities market in general, it is accepted to use the special stock indexes. Perhaps, the most simple and clear example – a Dow Jones Industrial Index, which today is used at the NYSE. Dow Jones Index is the average value of the securities of 30 leading US companies working in the industry. Another well-known all over the world index is S&P 500, it is based on the value of shares of 500 largest US public companies.
From a legal point of view, the stock exchange may be:
- State institution
- Joint-stock company
The legal form will depend on the state, in which territory the stock exchange acts. For example, most US stock exchanges are associations, stock exchanges of Japan and the United Kingdom (for the most part) – joint-stock companies and the stock exchanges of France – for the most part are state institutions.
How does trading occur in the stock market?
At this stage of the development of stock exchanges, there are two methods of trading:
- Through the use of the electronic trading system;
- Through a real intramural bargaining in the marketplace.
At NASDAQ, for example, trades occur only in electronic form. Traders have terminals that allow them to trade basing on quotes provided. However, here we will discuss “live” trading.
The most striking performance of exchanges, which trades take place on the trading floor – NYMEX and NYSE (New York Mercantile and New York Stock Exchange, respectively). Despite the active development of information technology, here trades on the trading floor continue.
The scheme of trading organization:
- The client informs the broker about their willingness to buy securities of the issuer
- The broker sends the order (bid) by phone to a person who works on the trading floor
- Next, the order is transferred to the trading platform to the trader
- The trader is looking for another trader who wants to sell securities that the client is interested in
- Next, traders agree on the price of securities and fulfill their orders
- Data about the purchase (executed order) returns to the client according to feedback scheme, the broker calls back and speaks about the successful transaction.
How do remote trading on the stock exchange occur?
In the age of active development of computer systems, work on the stock market has undergone significant changes. From now on, a trader can trade from anywhere in the world, with only a computer and a stable internet connection – all trading transactions are made on-line. Let us briefly describe the procedure:
- The trader sets on his computer a stock exchange terminal (program)
- By using this program, an application is exposed at the exchange, which indicates the number of lots, the issuer of the shares, the intended bid price. An application may be market or limited, also there is a stop-application.
- After that, the application goes to the exchange server, where it is checked for the presence of counter orders with the specified (or better) price.
- Once the application is found, the deal is done. If at this price there are no counter orders, it remains in the exchange database until the cancellation by the trader or until an offer appears.
- If the transaction is successfully completed, a record of investor’s ownership of shares is done. Recording is stored in the broker’s depository.
Almost always, the shares have offers and bids (respectively, unexecuted orders for sale and purchase). The queue of similar applications is as follows – bids are below (there are no traders willing to sell at such a low price), offers are located above (no traders willing to buy so expensive). Between offers and bids there is a gap, called spread. The lower boundary of spread is the best application for the purchase, the upper limit of spread is the best application for sale.
Detail of a common queue of applications (referred to as “glass”) is displayed in the exchange terminal.
That’s all for now. Got any questions? Just ask the expert!