WORKING OF A STOCK EXCHANGE
A stock exchange also referred to as a share market or bourse is a corporation or mutual organization that provides a platform for stockbrokers and traders to trade company stocks and other securities. They also play a role in the sense that they provide facilities for the issue and redemption of securities and other financial instruments and capital events also including the payment of income and dividends.
Shares issued by companies, unit trusts and other pooled investment products and bonds are the securities that are traded on the stock exchange. It is not possible to trade a certain security on a certain stock exchange if it has not been listed there.
With the passage of time as modern markets are increasingly electronic networks, trade has become less linked to a physical place which might be at the most necessary for recordkeeping. These electronic networks have the advantage of speed and reduced transactions costs. Only members and stock and share holders can trade on the exchange.
The primary market is where the initial offering of stocks and bonds to investors is done and the subsequent trading takes place in the secondary market. There are many factors that affect the demand and supply in the stock markets which impact on the price of the stocks.
With the passage of time as the world becomes a global village, many more stock exchanges are increasingly becoming a part of the global market for securities.
A person or a company who buys and sells stocks on behalf of another person or a company while charging a commission on the sale and purchase of the stocks is called a stockbroker. He also acts as a useful bridge in linking up buyers and sellers. He also not only trades stocks on behalf of the clients but also can be approached for advice with regard to which stocks, mutual funds etc to buy. In fact, these days some brokers offer transaction services online in the form of a website interface offering commissions as low as one or two USD and fast transaction rates upto two seconds. Nowadays with the prevalence of automated stock broking systems on the internet, many a time the client has absolutely no personal contact with his stock broking firm because the system performs all the stock broking functions, obtaining the best price and executing the trade. A lot of people seek the guidance of a broker and are prepared to pay for his services because they are more confident making major decisions about their finances while being advised by a licensed professional.
The part of the capital market that deals with the issuance of new securities is called the primary market. The sale of new stocks or bond issues help companies, governments or public sector institutions obtain funding which is usually done through a syndicate of securities dealers. This process of the selling of new issues to investors is known as underwriting and if it is a case of a new stock issue, this sale is known as an initial public offering (IPO).
The financial market for trading of securities which have already been issued in an initial private or public offering is called the secondary market whereas the market that exists in a new security just after the new issue is very often known as the aftermarket
Consequently, following the listing of the newly issued stock on a stock exchange, investors and speculators can trade on the exchange with ease as market makers provide bids and offers in the new stock.
Since securities are sold by and transferred from one investor or speculator to another, the secondary market should be highly liquid or transparent. Before the advent of technology, this liquidity was achieved by the regular meeting of the investors and speculators at a fixed place which is also how the stock exchanges originated.
For the existence of an efficient and modern capital market, secondary markets are an important factor while also being an important bridge that links the investor’s desire for liquidity i.e. not to tie up his money for long periods with the capital user’s desire to be able to use the capital for an extended period of time.
With the prevalence of a securitized loan or equity interest, the investor can sell his interest in the investment with ease, more so if the loan or ownership equity has been broken into relatively small parts. Secondary market trading is defined as the selling and buying of small parts of a larger loan or ownership interest in a venture.
Traditionally under the usual lending and partnership agreements, the general practice for investors is to desist from sinking their money in long term investments and they are more likely to charge a higher interest rate or demand a greater share of profits in case they do agree but in the case of secondary markets, investors can recover their investments quickly if there is a change in their own circumstances.
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