What is the Stock Exchange?

Definition of the Stock Exchange

The stock exchange is a market place where one can buy or sell financial securities . It trades different asset classes such as stocks, bonds, commodities, derivatives and futures . Some exchanges specialize only in one area such as commodities but the majority of exchanges are stock exchanges (shares, bonds and derivatives).

Each stock exchange has one (or more)  organized and regulated market . This means that buyers and sellers do not come into contact directly. Transactions are carried out via a stock market ordering system, then the orders are transmitted to a clearing house (a kind of trusted third party that could be compared to a notary). The securities can then be delivered to the buyer and the money collected by the seller. This complex system allows buyers and sellers to evolve in a perfectly secure environment.

The stock exchange provides continuous quotation on the various assets it covers. These prices are the result of the confrontation between supply and demand. A regulator checks past transactions on the stock exchange to ensure that none of the parties (buyers or sellers) has been privileged.

A financial asset can have several quotes. It can be listed on several exchanges. The prices of the same asset are positively correlated between the different exchanges.

The stock market, a source of funding

The stock market is often associated with speculation by individuals. This speculation is very present and it allows to ensure better liquidity of the securities traded on the stock exchange. However, the role of a stock exchange is also to allow the financing of companies. There are companies looking for capital to develop their activities and investors with liquidity. The stock market is therefore essential to the proper functioning of our economy. It also allows individuals and institutions to become partners in companies by purchasing shares.

The stock market is also a financing tool through bonds. With the issuance of bonds, governments and companies borrow financial markets . Instead of borrowing money from a bank, they borrow from investors (individuals or institutions). The Stock Exchange therefore allows an individual to become a creditor of a company or a State.

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