Definition of Stock Exchange

 Definition of Stock Exchange

 written by: suebest What is the definition of stock exchange? 

Stock exchange can be defined as a venue where security trading usually takes place and which trading is done using a system that is organized. These securities include shares, notes and bonds that can be purchased and then sold at various prices. These prices are usually determined by the level of demand as well as supply. Basically, stock exchanges serve two main markets i.e. primary markets and secondary markets. Primary markets are where governments, municipalities, corporations as well as other incorporated bodies are able to raise their capital through channeling investor savings into ventures that are productive. Secondary markets involve instances where investors sell off their own securities to other interested investors in exchange for cash. This is meant to reduce their investments risks as well as maintain the system's liquidity.

Listing 

In order to enable a security to be traded in a certain stock exchange, it must first of all be listed in that stock exchange. This listing in corporate finance is referred to the existence of a certain company’s shares on a board or list of stock that are traded officially in a stock exchange. There are several listing requirements that the company ought to comply with before their shares get listed. These are the financial statements of a few years, the shares placed among the general public or free float, approved prospectus among others. In the past there was a particular place where shares were listed but due to the advent in technology, it is not a must for a company to go to these conventional places. The old stock exchange where trading activity used to take place is slowly being replaced by more modern electronic communication networks. The people who are authorized to trade on a stock exchange are only the brokers who ought to be members of the exchange.

How is the trade conducted?

Trading in the primary market is mostly by way of initial public offering (I.P.O.). This is where the shares of a particular company are firstly sold to the institutional investors who then sell them to the general public in turn. The trading is done on a securities exchange for the very first time. This process usually transforms a private company to become a public company. Subsequent trading then happens in the secondary market. The stock exchange thus forms a component that is most important to a stock market. The prices of stock are also affected by all the factors that affect the demand and supply in all the free markets. To ascertain the true value of a stock, a stock valuation method is usually applied.

There are no specific obligations that stock should be issued only through the stock exchange nor should it be subsequently traded on the stock exchange strictly. There are other methods of trading stock and these are over-the-counter and off exchange. These are the methods that bonds and derivatives are usually traded. Stock exchanges have increasingly become part of the global securities market. They seek to provide the necessary facilities for redemption and issue of both securities and various financial instruments. The stock exchanges are also useful for income and dividends payments capital events.