What is a stock exchange?
Getting listed on the stock exchange is a way of raising capital through selling company shares publicly. Discover all you need to know about stock exchanges and learn how to trade in company shares from there.
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Definition and meaning: what is a stock exchange?
A stock exchange is a centralised location where the shares of publicly traded companies are bought and sold. It’s important to note that the stock exchange differs from other markets where securities are bought and sold, because the tradable assets are limited to shares, bonds and other financial instruments like exchange traded funds (ETFs).
Sellers of stocks initially comprise of companies that turn to the exchange for the purpose of raising capital – through selling equity – and providing interested members of the public the opportunity to buy and trade shares.
If you want to take ownership of the company shares, the stock exchange is where the equity will be listed. It’s important to note that the company stocks are not sold by the exchange, though the sale is facilitated there.
Some of the most popular exchanges in the world include the New York Stock Exchange (NYSE), the NASDAQ, and the Tokyo Stock Exchange (JPX). Other well-known stock exchanges include the London Stock Exchange (LSE), the Shanghai Stock Exchange (SSE) and the Bombay Stock Exchange (BSE).
How is a stock exchange different to the stock market?
The stock exchange is a physical infrastructure – although accessible digitally – that enables buyers and sellers of shares to meet in a common place where their transactions can be regulated.
The stock market, on the other hand, is an all-encompassing term that refers to the non-physical place where financial transactions of listed companies take place. The transactions performed in the stock market are conducted through an exchange or over-the-counter (OTC) marketplace.
The two terms may be used interchangeably; however, they represent two different things. The stock market functions as a result of the existence of stock exchanges. Investors can track real-time pricing information from the stock exchange, then decided to buy or sell the shares in the market.
Stock exchanges vs over the counter (OTC) trading
Over-the-counter or OTC trading refers to the buying and selling of securities that’s not conducted on a formal exchange venue or platform. Instead, it’s a decentralised market, where most trades are performed between two parties (the buyer and seller) and are often handled via a dealer network.
Unlike exchange-based trading, OTC trades are less regulated, which creates a range of opportunities – but also some risks, which you need to bear in mind.
The main difference between using a stock exchange and OTC methods of trading is that, on an exchange, transactions are mediated rather than taking place directly between two parties. This means that there are stricter regulations imposed on investors and speculators, as well as on the companies listed.
There are different ways that institutions get listed on an exchange, either via a Special Acquisition Purpose Company (SPAC) merger, an Initial Public Offering (IPO) or direct listing.
How to trade on a stock exchange
With over 18,000 shares available to you, there are several ways to take a position on popular stocks and ETFs worldwide. We’ve compiled a comprehensive guide that features a list of steps to get you started:
- Research your preferred market
- Open an account or practise on a free demo
- Select your opportunity
- Set your position size and manage your risk
- Place your deal and monitor your position
Trade using CFDs
You can get exposure via derivatives trading, where you don't take ownership of the stock, but speculate on its price rising and falling. Using CFDs, you’ll trade on leverage, where you’ll need 20% of the full value size as your deposit to open a position.
You should remember that leverage trading will amplify your risk, as both your profits and losses will be calculated based on the full size of your trade, not the deposit you used to open the position. Therefore, it’s important to take steps to manage your risk.
Pros and cons of stock exchanges
Before you get started trading via the stock exchange, you need to consider the pros and cons of choosing this avenue:
Pros of stocks exchange
- You can get exposure to company stock via an exchange by buying shares to have equity ownership and earn dividends if the company grants them
- Several companies want to be listed on a stock exchange. A listing comes with a certain level of recognition and prestige. While there are many stock exchanges worldwide, the older ones like Amsterdam, London, and New York stock exchanges hold a certain esteem among the public
- The stock exchange is a heavily regulated entity, which lessens the risk for traders of counterparty default in comparison to OTC trading
- People who don’t have sufficient experience trading on the stock exchange can use the assistance of an online brokerage firm to gain exposure to company shares
Cons of stock exchanges
- Getting a company listed on a stock exchange typically takes time and money to complete. Once the company is listed on the stock exchange, it has responsibilities towards shareholders
- There’s no guarantee of stability when trading on the stock exchange. Every company stock can be positively or negatively impacted by market volatility as a result of political or economic events around the world
- While occurrences of the stock exchange crashing are few and far between, previous experiences of this event happening have had an impact on the value of stocks
- Like any investment, there’s risk of losing capital if the company performs poorly. The sequence of events will include investors and traders selling their stake in the company and the stock price will drop
Stock exchanges summed up
- The stock exchange is a physical venue (although available online as well) where buyers and sellers can meet to trade publicly listed company shares
- The share price of companies listed on the stock exchange is determined by how much the seller values them, the demand from buyers of the stock, the performance of the company and market conditions
- The stock exchange is infrastructure where listed company shares are bought or sold while the stock market represents the transactions of securities that take place in exchanges
- OTC trading involves transactions between two parties, the buyer and seller which differs from getting exposure to company shares through a centralised and regulated stock exchange
- You can get exposure to shares of publicly listed companies on the stock exchange by trading with us
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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