The Stock Exchange

Definition and functions of the Stock Exchange

Definition and functions of the Stock Exchange

linedividerThe main purpose of the stock market is to make fools of as many men as possible.
Bernard Baruch

If the general function of the different stock markets is to fuck as many men as possible, that of the Italian one is mainly to cheat, deceive, deprive and defraud the largest number of poor assholes.
Carl William Brown

The stock market is a device for transferring money from the impatient to the patient.
Warren Buffett

If stock market experts were so expert, they would be buying stock, not selling advice.
Norman Ralph Augustine

Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.
George Soros

The stock exchange, also called stock market, or (in continental Europe) bourse, is an organized market for the sale and purchase of securities such as shares, stocks, derivates and bonds. The capital of a company is divided up into parts which are called “shares”. Shares are the result of dividing the capital invested in a company into equal units. In the USA, shares are known as “stocks” and their owners are called “stockholders”.

People buy shares because they hope to make a profit by selling them after their value has risen. They may also earn a dividend from the company’s profits. However, there are risks involved: shareholders risk a loss if the value of the shares goes down or if there are no company profits to be divided, in which case they receive nothing.
A bond is a document issued by a government or company when borrowing money from the public. The holder of the document is called a `bondholder’. The bondholder can use the document to obtain repayment of the loan, plus a fixed rate of interest.

Trading on the Stock Exchange now takes place 24 hours a day in the main trading centres of the world. It is often said that `as one market closes, another opens.’
The markets of America are opening when London and other European markets close. The important markets of the Far East (Hong Kong and Japan) open as American markets close.

In most countries the stock exchange has two important functions. As a ready market for securities, it ensures their liquidity and thus encourages people to channel savings into corporate investment. As a pricing mechanism, it allocates capital among firms by determining prices that reflect the true investment value of a company’s stock. (Ideally, this price represents the present value of the stream of expected income per share.)

Membership requirements of stock exchanges vary among countries, mainly with respect to the number of members, the degree of bank participation, the rigour of the eligibility requirements, and the level of government involvement. Trading is done in various ways: it may occur on a continuous auction basis, involve brokers buying from and selling to dealers in certain types of stock, or be conducted through specialists in a particular stock.

Technological developments have greatly influenced the nature of trading. By the 21st century, increased access to the Internet and the proliferation of electronic communications networks (ECNs) had allowed electronic trading, or e-trading, to alter the investment world. These computerized ECNs made it possible to match the orders of buyers and sellers of securities without the intervention of specialists or market makers. In a traditional full-service or discount brokerage, a customer places an order with a broker member of a stock exchange, who in turn passes it on to a specialist on the floor of the exchange who actually concludes the transaction.

The traditional specialist makes a market for a stock on the exchange by matching buy and sell orders in his exclusive “book” and establishing a price for the trade. In the over-the-counter market, market makers establish prices by setting “bid” and “asked” spreads with a commitment to complete trades in a given security. In e-trading the customer enters an order directly online, and specialized software automatically matches orders to achieve the best price available. In effect, the ECN is a stock exchange for off-the-floor trading. As a result, the operations of some stock exchanges, such as NASDAQ, need not be centralized in one location but can be coordinated electronically from a number of different locations.

In basic ways the Stock Exchange operates in much the same way as any other market. In fact it is often known as the Stock Market and fundamentally its main functions are the following:

(1) Providing Liquidity and Marketability to Existing Securities.
(2) Pricing of Securities.
(3) Safety of Transactions.
(4) Contributes to Economic Growth.
(5) Spreading Equity Cult.
(6) Providing Scope for Speculation.

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About Carl William Brown

I'm Carl William Brown a holistic teacher, webmaster, trader, and writer of aphorisms and essays. I have written more than 10,000 original quotes and I'm working at my only novel, Fort Attack, which is also a wide and open blog project. At the moment I'm teaching English in a secondary school, but up to now I have done a lot of other things as well, both in business, education, sport and social fields. Some years ago, in 1997 following the examples of the Rotary and the Lyons I founded the Daimon Club Organization to promote every sort of social, artistic and financial creativity and to meet new friends with these kind of interests.
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