Having an understanding of how shares work is fundamental to becoming a successful share trader, primarily because it allows investors to develop a better insight into how shares are priced, what makes a share attractive to traders and how the markets are likely to respond to given external prompts. Beyond that, understanding the mechanisms of how and where shares are traded complete the picture of the fundamentals in relation to share trading, allowing you to move on to consider the finer points of strategy and share dealing technique.
Shares are predominantly traded through stock exchanges around the world, and there are a number of different major exchanges on which you may find yourself trading. Shares are also traded on alternative share markets and indices to a lesser extent, allowing investors access to less mainstream corporate securities. Now its time to turn the attention to how these stock exchanges function, and just why they are so valuable to the international investing community and the whole financial system.
Stock Exchanges – What They Are, How They Work
Fundamentally, share trading has been made possible as a truly international and staple form of investing as a result of stock exchanges. While the concept of a stock exchange might seem reasonably straightforward, the exchanges actually provide a vital service in connecting both buyers and sellers of shares, in addition to laying the groundwork for facilitating these essential transactions.
A stock exchange is basically the organisation responsible for running stock markets – individual catalogues of shares collated into categories, usually by size (e.g. the FTSE 100 and the FTSE 250, both of which are operated by the London Stock Exchange). In addition to cataloguing the individual securities available for traders to buy and sell, stock exchanges also facilitate the physical transactions, executing orders as they are received from brokers to actually process traders’ transactions. While transactions today are exclusively processed through an automated platform, the system is maintained and managed by the stock exchange, which enables brokers to execute orders on behalf of their clients to enable the practical functioning of the trading process.
But aside from the practical, functional purpose of stock exchanges in actually affording share transactions, they also perform an essential role in regulating and standardising shares and share dealing throughout the transaction. Because the stock exchanges have stringent listing requirements, imposed on both the companies that list their shares and on the formulation of the shares themselves, traders can engage in the markets with the reassurance that there is sufficient regulation to ensure fair play.
Stock markets are both the physical (or rather, electronic) place in which shares are transacted, and also the first-stage regulator of the markets, performing a crucial function in streamlining and overseeing the investment process. As a result, they are the largely unsung heroes of worldwide trading activity, facilitating the billions of share deals being executed day in, day out in a timely, efficient and cost-effective manner.