Stock Exchange and How it Works

The stock exchange is also called the stock market or organized market for the sale and purchase of securities such as shares, stocks, and bonds. Stock exachange ensure their liquidity, thus encouraging people to channel savings into corporate investments.

People are asking, What do you mean by stock exchanges? What are the 3 major stock exchanges? What are the 4 major stock exchanges? What is stock exchange and how it works?

As a pricing mechanism,it allocates capital firms by determining prices that reflect the true investments value of the company’s stock. Ideally, this price represents the value of the stream of expected income per share.

A stock market is a regulated and controlled environment. In the United States the main regulators includes the securities and exchange commission (SEC) and market participation under the purview of the Financial industry regulatory Authority (FINRA).

What is stock exchange:

The stock market broadly refers to the collection of exchanges and other venues where the buying,bselling and issuance of shares publicly companies takes place. Such finàncial activities are conducted through institutionalized formal exchanges (whether physical or electronic or through over-the-counter) and Market places that operate under a define set of regulations.

While both terms stock exchange and stock market are often use interchangeably, the former term generally comprises of a subset of the later. If one trade in the stock market,it means that they buy and sell shares on one or more of the stock exchanges that are part of over all stock market. A given country may have one or more exchange comprising their stock market.

• stock market are venues where buyers and sellers meet to exchange equity shares of public corporations.

• they perform several functions in the market , including efficient price discovery and efficient dealing.

• stock market are vital component of  free-market economy because they enable democratized access to trading and exchange of capital for investors of all kinds.

How to understand the stock market:

The stock market allows numerous buyers and sellers of securities to meet, interact and transact. Stock markets allows for price discovery for shares of corporations and serve as barometer for the overall economy is the number of stock market participatants is much, one can always be assured of a fair price and high degree of Liquidity as various market participate compete with one another for the best price.

Since the stock market brings hundreds of thousands of market participate who Wish to buy and sell shares,it ensures fair pricing practices and transparency in transactions, while earlier stock exchange use to issue and deal with paper-based physical share certificate, the modern day computerized stock markets operate electronically.


How Does Stock market works?

Stock market provides a secure and regulated environment where market participate can transact shares and other eligible financial instruments with confidence, with zero to low operational risk. Operating under the defined rule as stated by the regulator, the stock market act as both the primary and secondary market.

As a primary market the stock market allows companies to issue and sell their shares to the common public for the first time through the process of initial public offering. This activities helps companies raise necessary capital from investors. It’s essentially mean that a divides itself into a number of shares and sell a part of those shares to the public for a price.

To facilitate this process,a company needs a market place where these shares can be sold. This market place is provided by the stock market. If everything goes smoothly as planned, then the company will successfully sell their shares at a price of 10percent.investors will get the company shares which they can decide to hold their preferred duration in anticipation of rising in share, price and any potential income in the form of dividend payment,the stock exchange act as a facilitator for this capital rising process and receive a fee for it’s services from the company and its finàncial partners.

The stock exchange shoulders the responsibility of ensuring price transparency, liquidity, price discovery and fair dealing in such trading activities as almost major stock market across the globe now operate electronically, the exchange maintain trading systems that efficiently manage the buy and sell orders from various market participants.

They perform the price matching function to facilitate trade executing at a price that is fair to the buyers and sellers.

A listed company may also offer new additional shares through other offerings at a later  stage, such as through right issues or follow-on offerings.

They may buy back or delist their shares, the stock exchange facilitate such transaction,the stock exchange also maintain all company’s news, announcement and financial reporting which  can usually be accessed in their official website.

A stock exchange also support various other corporate levels transaction-related activities. For instance, profitable companies may reward investors by paying dividends that usually comes from part  of the company’s earnings. The exchange maintains all such information and may support it’s processing to a certain level.

Who are stock exchange participate?

Along with long term investors and short term traders,many different participate are associated with the stock market,each participate has a unique role, but most of the time are intertwine and depend on each other to make the market run effectively.these participate includes:


These are professionals who invest portfolio’s or collection of securities for clients. These managers get recommendation from analyst and make the buy or sell decision for the portfolio manager to make decisions and set the investment strategies for the money that they hold.


These are institutions that holds unto the customers securities for safe keeping to minimize the risk of their theft or lose.these institutions also operate in sync with the exchange to transfer shares  to/from the respective accounts of transacting parties based on trading on the stock market.


Also known as registered representative in the United States,are licenced professionals who buy and sell securities unbehalf of the investors. The brokers act as intermediaries between the stock exchange and the investors by buying and selling stocks unbehalf of the investors. An account with a retail broker is needed to gain access to the market.


These are people who represent companies in various capacities such as private companies who wants to go public through an initial public offering or companies that are involved in pending mergers and acquisition. They take care of the listing process in compliance with the regulatory requirement of the stock market.

Market markers are brokers-dealers who facilitate the trading of shares by posting bids and ask prices and maintaining an inventory of shares. They ensure sufficient liquidity in the market for a particular set of shares and profit from the difference between the bid and the ask price that they quote.


The speculators engaged in directional bets in the market with the individual stocks or broader indexes. Speculators can take long positions by buying shares or short position by short selling. Some speculators hold on to their positioning for a relatively long time based on technical analysis.

Functions of stock exchange:

Efficient price discovery:

Stock exchange needs to support an efficient mechanism for price discovery, which refers to the act of discovering the proper price of a security and is usually perform by assessing market supply and demand and other factors associated with the transaction.

Liquidity maintenance:

While getting the numbers of buyers and sellers for a particular finàncial security are out of control for the stock market, it needs to ensure that whoever gets access to place orders should get excited at a fair price.

Security and validity of transaction:

It ensures that all associated entities operating in the market adhere to the rules and work within the legal framework given by regulators. it’s making sure that all participants are verified.

Protecting investors:

Along with wealthy and institutionalized investors, a very large number of small investors are also serve by the store market for their small amount of investment. These investors may have limited financial knowledge and not be fully aware of the pitfalls of investing in stock and other listed instruments.

The stock market is one of the most vital component of a free-market allows companies to raise money by offering stock shares and corporate bonds.

It allows common investors to participate in the Financial achievement of the companies, make profit through capital gains, and make money through dividends.

Although losses are possible, while institutional investors and professional money managers do enjoy some privileges owning to their deep pocket , better knowledge and high-risk taking abilities, the stock market attempts to offer a level paying field to common individuals.

About admin

Augustus Sylvester Victor A Content Writer, Athlete, Organist and a Tutor from Akwa Ibom State, Nigeria.

View all posts by admin →

Leave a Reply

Your email address will not be published. Required fields are marked *