What is the stock exchange? A guide for beginners

25 Oct 2018

 What is the stock exchange? A guide for beginners

If you are about to venture into the world of investments, you should know that the vast majority of stock transactions are carried out in places known as stock exchanges, but... What are they?  Is there more than one stock exchange in the world? In this article we will explain everything you need to know to make your future investments  safely and successfully. 

What Is a Stock Exchange?

First things first, let's define the term. It refers to an institution, association or organization that enables trading shares, bonds, or any other security. In stock exchanges, buyers and sellers perform their operations during specific hours and on business days. These trades are governed by certain regulations, where the safety of users is monitored through a control in the firms and brokers involved in the transactions. Companies that are traded within these financial markets are referred to as listed.

Securities or shares that are not listed within a respective market or stock exchange are sold Over-The-Counter (OTC) generally through smaller companies and that represent a greater risk, since they do not comply with all the requirements required to trade within the stock market. 

In the beginning, the largest and first class shares were traded in the over-the-counter market. Then, they migrated to the Big Board, better known as the New York Stock Exchange. 

What Is the Function of a Stock Exchange?

Stock Exchange

When a business or company begins to show its fruits through the purchase and sale of shares, the main owners of these, most likely, will want to sell them in the future in exchange for an even greater reward. Maybe they do it in order to pay for the universities of their children or to buy a new house, the options are endless. What really matters is that the owners of these shares get a buyer belonging to the secondary market without major inconveniences... and that is where the stock market comes into play. 
If the stock exchanges do not exist, the owners should search among their family, friends, acquaintances, partners or any member of the community, hoping to find the person designated for the sale of their shares. Certainly, this is still very common nowadays, since not everyone dares to venture into this of stock exchanges, but, on the contrary, they feel more secure doing it through certificates endorsed and signed through a lawyer or another designated body. This is the secondary market that we mentioned a little above, the one that emerged after the stock market closed during the First World War as an alternative to maintain commercial activities. 

However, the secondary markets present a great disadvantage: there are no previously established prices. This means that while you are selling your shares for $50, another person may be receiving $70. In addition, another important difference is that, when operating within the stock exchange, it will not be necessary for you to know the other person involved in the operation, this could be in the middle of nowhere or, it could be a multibillion-dollar insurance company and you would never know, undoubtedly guaranteeing the identity of its users. Stock exchanges allow you to find a buyer and seller for everything you need. 

In the same way, so that more and more people had the opportunity to trade within a stock exchange, the New York Stock Exchange Board was created, which was led by a group of stock brokers who decided to meet outside of the stock market at 68 Wall Street and sign the Buttonwood Agreement. Then, after about 75 years (around 1863) it was officially called the New York Stock Exchange, better known by its acronym, NYSE. 

What are the main stock exchanges of the world?

New York Stock Exchange

Previously, the United States had regional stock exchanges that were in charge of the transactions of a particular part of the country. For example, in San Francisco there was the Pacific Stock Exchange, which was run by brokers to help local investors who wanted to liquidate or buy their share of an asset. However, today most of these regional stock exchanges were closed and supplanted due to the great boom that micro-chip and electronic networks achieved. Those that today allow us to trade with people at any part of the globe. 

The fifteen best stock exchanges positioned by market capitalization of listed securities are: 

  1. The New York Stock Exchange located in NYC
  2. NASDAQ (National Association of Securities Dealers Automated Quotations): It is an electronic stock exchange also located in New York City.
  3. London Stock Exchange located in London, UK.
  4. Tokyo Stock Exchange, better known worldwide as Japan Exchange Group, located in Tokyo, Japan.
  5. Shanghai Stock Exchange, located in Shanghai, China.
  6. Hong Kong Stock Exchange, located in Hong Kong.
  7. Euronext, located throughout Europe (France, Portugal, the Netherlands, Belgium).
  8. Shenzhen Stock Exchange: located in Shenzhen, China.
  9. TMX Group: Canadian stock exchange located in Toronto, Canada.
  10. Deutsche Börse: German based stock exchange, located in Frankfurt, Germany.
  11. Bombay Stock Exchange: located in Mumbai, India.
  12. National Stock Exchange of India, also located in Mumbai, India.
  13. SIX Swiss Exchange: Zurich exchange located in Zurich, Switzerland.
  14. Australian Securities Exchange, located in Sydney, Australia.
  15. Korea Stock Exchange: The stock exchange of South Korea located in Seoul, South Korea.

What is the difference between a traditional stock exchange and a Commodity exchange?

When speaking of a traditional stock exchange, it refers to the market where property titles are bought and sold for various assets or stocks. For its part, the term "Commodity Exchange" refers to those exchanges where agricultural commodities and metals are traded, such as soybeans, cattle, oils, silver, coffee, gold, corn. These are purchased between various parties in order to convert it into a commercial investment or, to trade with them in different markets.

Conclusion

With this article, our main objective was to explain in a simple way what the stock exchanges represent today, since we are all capable of investing in them and generating considerable income. So if you're one of those people, you could start investing with Libertex at no additional cost,  only creating a free demo account. Libertex, in turn, offers you an opportunity to trade CFD's (contract for difference) not only on securities, but also on cryptocurrencies and even commodities. If you still do not feel safe, we invite you to take our free lessons, with them you will learn the best techniques to start trading as soon as possible with real money. Start today!

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