what is stock exchange?

What is an Exchange?

An exchange is an institution, organization, or association which hosts a market where stocks, bonds, options and futures, and commodities are traded. Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules and regulations on the firms and brokers that are involved with them. If a particular company is traded on an exchange, it is referred to as "listed".

Companies that are not listed on a stock exchange are sold OTC (short for Over-The-Counter). Companies that have shares traded OTC are usually smaller and riskier because they do not meet the requirements to be listed on a stock exchange.

The Stock Market
how it Works

A stock market may be thought of in terms of two separate functions:

1. The Primary Market Function:

The place where companies can raise long term funds for their operations by issuing shares and other securities to investors.

2. The Secondary Market Function:

Where investors can buy and sell those shares at current prices as determined by other investors in the market.

A Place where Companies Can Raise Capital

A Company that wishes to set up a new business or expand its existing business can raise the capital it requires either by borrowing money or by issuing shares to investors.

The investors become shareholders in the Company, meaning they are part owners of the Company and share in its profits and growth.

Companies wishing to have their shares traded must first be listed. To become listed, a Company must be large enough for there to be a market in its shares and it must agree to abide by the listing rules which, amongst other things, require it to keep the market informed of its activities and to regularly reports profits and other financial information.

A Marketplace for Buyers and Sellers

After a Company has listed and issued shares to investors, the shares can then be sold to other investors in the stock market.

Private individuals can buy shares directly through an adviser at a stock broking firm, or they can place their money with a fund manager or financial institution, perhaps one which manages an equity trust or superannuation fund. The fund manager will decide where and how to invest the money.

The buying and selling of shares takes place on the electronic trading system with staff at stock broking firms entering buying and selling orders on behalf of investors.

The price of the shares is determined by the forces of supply and demand, as private investors and fund managers decide at what price they will buy and sell.

Private investors are very important in the process as they control a large percentage of total funds invested in the share market.

The share market provides an opportunity for investors to contribute to benefit from the wealth-creating activities of companies and in that way participate in the broader economy.

For private investors, wealth is created in the form of dividends and other income and capital gains from selling shares as prices rise.

What is dividend?

A dividend is the distribution of profits to a company's shareholders. The primary purpose of any business is to create profit for its owners, and the dividend is the most important way the business fulfills this mission. When a company earns a profit, some of this money is typically reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend. Paying dividends reduces the amount of cash available to the business, but the distribution of profit to the owners is, after all, the purpose of the business.

Stockbrokers

A stockbroker is referred to as the retail part of the market. Stockbrokers act on behalf of clients and buy and sell shares on their behalf and generally belong to firms who are members of the Stock Exchange.

They earn their money from charging a commission on each transaction. They might also advise clients on the shares that the client might be thinking of trading. Because there could obviously be a conflict of interest with stockbrokers advising clients of trades that might not be necessary to build the commission of the broker, their work is regulated by the Financial Services Authority (FSA). The rules are very tight and strictly observed and enforced. The process of buying and selling for the purpose of generating commission is called 'churning'.

Some stockbrokers may act as 'execution only'. This means they merely buy and sell shares at low commission rates but do not offer any advice.

Board of director

A company's board of directors provides the company with direction and advice. It is the responsibility of the board of directors to ensure that the company fulfills its mission statement. In doing so, the board of directors frequently sets the company's overall policy objectives. For these reasons, a good board of directors includes knowledgeable and experienced business people.

Typically, only one member of the board of directors is involved with the day-to-day activities of the company. This person is the Chief Executive Officer (CEO), and he or she acts as a liaison between the board of directors and the rest of the company. The CEO is responsible for communicating to the board of directors the daily status of the company, and for communicating and implementing the vision and policy objectives of the board of directors.

Market Makers

Market makers do not earn a commission from their activities. They simply buy and sell shares on their own account but make their money on the difference between the price they pay for buying shares and what they sell them for. This difference is called the 'spread'

Role of stock exchange

· The Stock Exchange helps companies to raise capital for expansion through selling shares to the investing public.

· They help in mobilizing savings for investment which in turn benefits for several economic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels.

· Companies can expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets.

· They help in Redistribution of wealth through stock price increases and dividends get a chance to share in the wealth of profitable businesses.

· They help to Create investment opportunities for small investors by enabling them to own shares of the companies as large investors, and to enjoy similar rates of return

· Its helpful for Government to raise capital for development projects, infrastructure projects such as sewage and water treatment works or housing estates

· Its serves as an economic Barometer, An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

Main stock exchanges of the world

Some of the main stock exchange of the world

· Tokyo stock exchange

· New York stock exchange

· London stock exchange

· Honking stock exchange

· Mumbai stock exchange

· Karachi stock exchange