Stock Exchange for Beginners

By Investor / Published on Saturday, 11 Feb 2017 07:42 AM

In this tutorial, we are going to discuss what is a stock exchange, what is it for and how did it impact your investing life. It is the best guide for all the investors who are looking for their future investment.

So, imagine that you have a big bulk of the share that you have to sell this morning such as 1,00,000 shares. This is not the bulk amount for people in the share companies. Now, how I will do the selling of these shares? They might be valuable for someone who is looking for 1,00,000 shares, in which case I suppose that you can get on the trail with them and agree on the price. And in the financial markets, finding your own counterparty and doing over the counter trading is also possible.

But there are some problems with it!

  1. It is not necessarily the quickest way of doing the things because you might have to spend some time looking around for the counterparty.
  2. Do you really trust them? What if you hand over your shares and you are not paid back? So, there is some kind of risk.

Within the stock exchange market, there are some members in it that are true and honest in the sharing. So, if I want to sell my shares, I will first of all look for the broker or a member of the stock exchange market and give him the selling instructions.

This broker will offer some services to the investors as they have some direct or indirect relationships with the stock exchange markets. So, the broker will aggregate this selling order with the other investors who have ordered the same broker and then this broker will pump the order through the stock exchange.

What is the role of the stock exchange here?

Most of the other investors (buys) must be pumping their orders that are same like yours with the help of their own broker into the stock exchange.

So, basically, this stock exchange actually matches the trades that is, it actually matches the buying and selling orders. These orders are matched with the help of order book. It is also possible to do the by the help of market makers (the more deals they get, the more they are impressive). This matching is an electronic based system and is becoming prevalent because of its fast and efficient service.

This stock exchange also guarantees your shares to both the buyers and the sellers. That is, if the buyer has not given the payment, then the stock exchange will do it. Similarly, if the seller has not given the shares, then the stock exchange will give it.

So, this stock exchange has the arrangement for the allowance of the settlement of the shares.

So, in order to do the match trading, guaranteeing and settlement, your broker is actually charging you for all of these tasks.

Why exchanges exist?

  1. Price Transparency

People use the closing price of the stock market and these prices vary each day. These prices are used by the marketers that they can value these prices accordingly. They are also important as the investors and buyers based on these prices make the trading. So, these exchanges are actually the reference point that is used by the people in their dealings.

  1. Anonymity:

If you can’t find the counterparty, then the stock exchange will sell your share without telling anyone who you are. It is important, otherwise, people will move prices against you whether you are going to sell 5 shares or 500 shares.