We often have to meet on the World Wide Web with offers to participate in trading on exchanges, but not all of us know what it is and why they are needed. In the article below we will try to understand the concept of the stock exchange and the main mechanisms of its activity.
Definition and history of the formation of the stock exchange
Translated from the Dutch stock exchange is a financial institution that has been continuously operating in the market of homogeneous goods and supervises the transactions of their purchase and sale. According to the definition, the implementation of such agreements have clearly stated time and place.
In turn, the stock exchange is a financial institution that regulates the implementation of transactions for the purchase and sale of securities, and only. The latter include stocks and bonds, both of state-owned companies and those with private capital.
This concept was first mentioned in the Middle Ages, in the 16-17th century, in the Dutch city of Amsterdam. The building in which there was the first in the world stock exchange, had a designation - the coat of arms in the form of three purses. By the 18th century, Russian loans began to be used in Amsterdam, and the beginning of stock trading in the Russian Federation can be attributed to this period.
Prerequisites for creating stock exchanges
Stock exchange as an institution of the securities market first became popular during the active development and dissemination of trade stocks and bonds. First, since each Issuer and potential shareholders needed specialised specialized place that would be equipped with all the necessary conditions for a successful and comfortable transaction.
Secondly, a professional stock exchange is a system to which only issuers of reliable securities are allowed, while others are eliminated during the preliminary quality assessment procedure. And since none of the potential buyers is seeking to acquire unreliable assets, such institutions are necessary.
Well and thirdly, openness of information is peculiar to organized trading, therefore the fulfillment of obligations is supported by a number of guarantees, which makes exchange trading highly demanded in the stock market.
Stock Exchange as an organizer of the market, its functions
The activities of such financial institutions are governed by a set of rules, so they have a number of well-defined functions from which they do not deviate. So, the stock exchange has the following characteristics:
- organizes the constant activity of the securities market;
- determines the prices of assets;
- is a kind of informant of the existing "goods";
- regulates the process of purchase and sale of securities;
- organizes the relationship between resellers;
- regulates the free cash flows between participants;
- guarantees the fulfillment of transaction conditions, organizes the liquidity of the assets involved
- determines the levels of market segments and the economy as a whole.
However, it is worth noting that the exchange performs the above functions only if it actively operates and carries out hundreds or even thousands of transactions every day.
The stock exchange is an institution that operates on a constant interaction between several participants, and without the presence of at least one of them normal activities of the organization impossible.
No such transaction will be concluded without the presence of a broker who registers the time of the agreement, informs potential buyers and fulfills the requests of customers.
The immediate procedure for the sale and purchase of securities is handled by the dealer, and the definition of the current quotes is assigned to its functionality.
A stockbroker is a narrow-focus specialist who controls the flow of definitely established types of stocks, and he accompanies brokers.
Traders are independent intermediaries who can buy securities, and then resell them at their newly established value.
Variety of exchange transactions
The stock exchange has several varieties of transactions. Primarily they are divided according to the urgency of the organization:
- cash (performed instantly);
- urgent (participants agree on a mandatory date of performance, which is subsequently adhered to).
The latter, in turn, are ranked according to the following components:
- price (determination of the transaction value relative to the settlement period - at the time of the transaction or at the time the conditions are met);
- settlement term (how many days will the cost be determined);
- the conclusion mechanism (are optional, firm and prolonged).
Any of the above transactions is concluded by drawing up a contract of sale that regulates the fulfillment of further obligations on both sides.
Stock Exchange - how to get started? The mechanism of trade in securities
There are several methods of trading securities in the stock exchange. So, for example, the most common is a simple auction, which is divided into the following types:
- English (it is also called the seller’s auction) is characterized by the determination of the starting price for a share by the issuer, which increases with each bid.
- Dutch (buyer auction) - for the potential conclusion of the transaction is going to several buyers and a wide range of sellers. The price of the transaction is constantly decreasing depending on the offers.
- Closed (a silent auction) – the Issuer announces the implementation of a package of securities, then buy them those wishing to apply for participation in the transaction, at a feasible cost, for which they will be able to buy the assets. Next, the seller identifies potential partner with whom he would work the deal is.