What Is A Stock Exchange?

A stock exchange is a marketplace where people can buy and sell investments like stocks and bonds. Traditionally, stock exchanges were physical locations where traders would meet to make transactions. Today, most trading happens electronically on online platforms.

Key Functions

One of the key functions of a stock exchange is to help companies raise money. Companies can sell shares of ownership (stock) on a stock exchange. Investors can then buy these shares, essentially giving the company money in exchange for a piece of ownership. This allows companies to raise capital to grow their business.

Stock exchanges also provide a platform for investors to buy and sell shares. Investors can buy shares of stock from companies on the exchange, hoping that the value of the stock will go up. If the stock price increases, they can then sell their shares for a profit. The price of a stock is constantly changing based on how many people want to buy it (demand) and how many people are selling it (supply). This is known as supply and demand.

Investment Options

Stock exchanges offer a wide range of investment options beyond just traditional stocks and shares. Here are some other instruments you can trade:

Bonds: These are essentially IOUs issued by companies or governments. By buying a bond, you’re essentially loaning money to the issuer in exchange for a fixed interest rate payout over time and the return of your principal amount at maturity.

Exchange-Traded Funds (ETFs): These are baskets of securities that track a particular index, sector, or commodity. So, instead of buying individual stocks, you can buy an ETF that represents a whole group of them. This offers diversification and can be a good way to invest in a specific market segment.

Derivatives: These are contracts that derive their value from an underlying asset, such as a stock, bond, commodity, or currency. Examples include futures contracts, which lock in a price for buying or selling an asset at a future date, and options contracts, which give you the right (but not the obligation) to buy or sell an asset at a certain price by a certain time.

In some cases, there may be exchange-traded commodities (ETCs) available. These are similar to ETFs but track the price of a physical commodity like gold, oil, or wheat. They offer a way to invest in commodities without having to take physical possession of them.

Global Stock Exchanges

Global stock exchanges act as the beating heart of the investing world, facilitating the buying and selling of company shares across every sector and industry. Some of the most prominent stock exchanges that drive global capital markets include:

• New York Stock Exchange (USA)
• NASDAQ (USA)
• London Stock Exchange (UK)
• Tokyo Stock Exchange (Japan)
• Shanghai Stock Exchange (China)
• Hong Kong Stock Exchange (Hong Kong)
• Toronto Stock Exchange (Canada)
• Bombay Stock Exchange (India)
• Frankfurt Stock Exchange (Germany)
• Paris Stock Exchange (France)
• Madrid Stock Exchange (Spain)
• Amsterdam Stock Exchange (Netherlands)

Oldest Stock Exchange

The title of oldest stock exchange goes to the Amsterdam Stock Exchange (currently called Euronext Amsterdam). It emerged in 1602, shortly after the founding of the Dutch East India Company. This company’s shares were traded regularly, creating a secondary market for them, which is considered the foundation of the modern stock exchange.

Biggest Stock Exchange

The biggest stock exchange in the world by market capitalisation is the New York Stock Exchange (NYSE). Market capitalisation refers to the total value of all the companies listed on the exchange. The NYSE has held this title for a long time, surpassing the London Stock Exchange.

Listing Requirements

Each stock exchange has its own listing requirements companies must meet to be traded on their platform. These requirements focus on a company’s financial health, size, and transparency.

Key Requirements

• Minimum Shares Outstanding: Exchanges mandate a minimum number of shares a company must have available for trading. This ensures sufficient liquidity for investors.
• Market Capitalisation Threshold: Companies must reach a certain market cap, the total value of their outstanding shares. This indicates a company’s size and potential for growth.
• Financial Track Record: Exchanges often require a minimum level of profitability over a set period. This reassures investors of the company’s ability to generate sustainable earnings.

Examples

• New York Stock Exchange (NYSE): The NYSE demands a high bar: at least 1.1 million shares worth $40 million combined and a minimum of $10 million profit over three years.
• London Stock Exchange (LSE): The LSE’s main market has different criteria. Companies need a minimum market cap of £700,000, three years of audited financial statements, and at least 25% of shares publicly available (free float). Additionally, they must demonstrate sufficient working capital for at least a year after listing.