How The Stock Exchange Operates - SS2 Economics Lesson Note
The stock exchange is a marketplace where stocks, bonds, and other securities are traded. The primary function or role of the stock exchange is in facilitating the trading of securities and providing a platform for companies, to raise capital and for investors to buy and sell securities. The various operations of the stock exchange include:
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Companies issue stocks: Companies issue stocks to raise capital. When investors buy these stocks, they become part-owners of the company.
Investors buy and sell stocks: Investors buy and sell stocks on the stock exchange. They do this through brokers, who act as intermediaries between the investors and the stock exchange.
Prices are determined: The price of a stock is determined by the forces of supply and demand. If more people want to buy a stock than sell it, the price goes up. If more people want to sell a stock than buy it, the price goes down.
Trades are executed: When a buyer and seller agree on a price, a trade is executed. This means the stock is transferred from the seller's account to the buyer's account.
Clearing and settlement: After a trade is executed, the stock exchange ensures that the trade is properly cleared and settled. This involves transferring ownership of the stock from the seller to the buyer and transferring payment from the buyer to the seller.
Trading continues: Trading on the stock exchange continues throughout the day. The stock exchange provides real-time information on stock prices and other market data to investors, brokers, and other market participants.