What is a Stock Exchange: How a Stock Exchange Works? With Basic Understanding

What is a Stock Exchange: How a Stock Exchange Works? With Basic Understanding

What is a Stock Exchange?

A stock exchange is a marketplace where securities, such as stocks and bonds, are bought and sold. Bonds are typically traded Over-the-Counter (OTC), but some corporate bonds can be traded on stock exchanges. Stock exchanges allow companies to raise capital and investors to make informed decisions using real-time price information. Exchanges can be a physical location or an electronic trading platform. Though people are typically familiar with the image of the trading floor, many exchanges now use electronic trading

How a Stock Exchange Works?

When a business raises capital by issuing shares, the owners of those new shares will want to sell their stake someday. Without a stock exchange, these owners would have to find a buyer by going to friends, family, and community members. The exchange makes it easier to find a buyer in what is known as the secondary market.

With a stock exchange, you will never know the person on the other end of your trade. It could be a retired teacher halfway around the world. It could be a multi-billion-dollar insurance group, a publicly traded mutual fund, or a hedge fund.

The exchange works like an auction and traders who believe a company will do well bid the price up, while those who believe it will do poorly bid it down. Buyers want to get the lowest price they can so they can sell for a profit later, while sellers are usually looking for the best price.

What are Stock Indices?

A stock market index is a statistical measure which shows changes taking place in the stock market. To create an index, a few similar kinds of stocks are chosen from amongst the securities already listed on the exchange and grouped together.

The criteria of stock selection could be the type of industry, market capitalization or the size of the company. The value of the stock market index is computed using values of the underlying stocks. Any change taking place in the underlying stock prices impact the overall value of the index. If the prices of most of the underlying securities rise, then the index will rise and vice-versa.

In this way, a stock index reflects overall market sentiment and direction of price movements of products in the financial, commodities or any other markets.