Stock Exchange Meaning
Stock Exchange is a market which includes numerous buyers and sellers willing to enter into different trade and exchange a particular product against the money wherein the product includes shares of the public company, debt instruments and so on where all the activities are regulated and controlled by specific regulations.
In the stock exchange, the products which are being traded are shares of a publicly traded companyPublicly Traded CompanyPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market., debt instrumentsDebt InstrumentsDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans., exchange-traded funds (ETFs), indices and options, equity swapsEquity SwapsEquity Swaps is defined as a derivative contract between two parties that involve the exchange of future cash flows. There are two basis of determining cash-flows, cash stream and equity stream., single-stock futures, and stock index futures, and many more. Due to modernization, the exchanges have shifted their functions online, making it pretty easier for traders and speculators to carry on their business and transactions.
- Function as a Mediator – There are different market participants all over the country, and to connect them, a strong and reliable facilitator is required. It is where the stock exchanges enter into the picture and complete the exchange of products and money.
- Regulate the Transactions – All the transactions, including the issuance of shares or other instruments, purchase, sale, and so on, all are prone to some illicit activities. In order to make all the transactions reliable and legal, a framework is required, which guides its functioning.
#1 – Online Transactions (E-functioning)
Earlier, such exchanges used to function offline, i.e., personal meets, and transactions were done manually. However, with advancements in technology and modernization, all the different functions have been shifted on e-platform. It has been an enormous step and provided a considerable relief to the players in the exchange.
#2 – Protection of Retail Investors
There are different categories of investors in the exchange, which include wealthy investors as well as small or retail investors. Retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making. have limited financial resources and knowledge; hence there are chances of them being exploited by big players. It puts certain bars and regulations which protect the small investors from being deceived.
History of the Stock Exchange
Various companies require funding, and the way which was discovered other than the loans was to raise funds from the public by making them a part of the company. When such a trend got popular, and some companies wanted to raise funds, and on the other side, there was the public who wishes to invest and get a handsome return on investment. It led to the birth of the stock exchange.
The exchange provided the public which various information about different companies who wish to raise funds, and people decides whether to invest or not into a particular company. Step by step, it got streamlined and regularized. More products were added to the portfolio, and it finally evolved a huge market for financial instruments.
#1 – Validation and Authentication of Transactions
There are numerous buying and selling requests at a time on the stock market, which could sometimes lead to a lack of efficient transaction completion. Hence, to validate that each transaction is processed correctly, and there is no room for any error is the responsibility of the Stock Exchange.
#2 – Price Determination
Prices of share and other financial instruments depend on the demand and supply prevailing in the market. So, it is one of the functions of the stock exchange to accurately determine the price of a particular product for a given time. Any blunder in such a mechanism could lead to more or less pay for a product.
Major Stock Exchanges in World
#1 – NYSE
NYSE is the biggest stock exchange in the whole world. It is situated in New York in the United States of America.
#2 – NASDAQ
The full form of NASDAQ is the National Association of Securities Dealers Automated Quotations. It is also an American exchange located in New York City in the United States of America.
#3 – Tokyo Stock Exchange
It is the 3rd largest in the world and the largest exchange in Japan.
#4 – Shanghai Stock Exchange
The Shanghai Exchange is the largest in China. It is an exchange operating independently in the People’s Republic of China.
#5 – Hong Kong Stock Exchange
It is the 3rd largest exchange in terms of market capitalization in Asia. As the name suggests, it is situated in Hong Kong.
How to Deal in Stock Exchange?
For striking a deal in the stock exchange, various things are required to be considered. Firstly, a person needs to decide and select a particular stock he wishes to invest in or trade. Such a decision is based on various information about the company, including its past performance and prospects.
After deciding the stock, he needs to choose the price band, which would be favorable for him to invest. When a stock hits his desired price range, he will purchase the said stock through the investing account available with him and pay the investment amount. All the said procedures will be carried out online with no or least human interference. Further, when a stock fits in his selling price range, he will execute a selling order and will get his investment back with the return earned.
It is a very imperative component of a free market economy. The below mentioned are some of the merits from a different perspective:
#1 – Importance from Perspective of Company
Various companies require funding to carry out businesses and to try out new ventures. They issue different instruments such as shares and debentures to raise funds wherein stock exchange helps them get their funds from investors and allot such financial instruments to the investors.
#2 – Importance from Perspective of Investor
Investors are willing to get a handsome return on their investments. The exchanges provide them different avenues to invest their funds and obtain passive income. Investors analyze different data and which in turn provides them great Return on Investment (ROI).
This article has been a guide to Stock Exchange and its meaning. Here we discuss its functions, features, history, and how to deal in it along with importance. You may refer to the following articles to learn more about finance –