Lesson Corporate Finance: Stock Exchange and its functioning

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About Shruti_Mishra: I am a maths graduate from India and am currently persuing masters in Operations Research.

A stock exchange is alternatively called a share market or a bourse. It is an organization which provides facilities for trading of a company's stocks or other securities. Stock exchanges make the trading much more organized by listing the bid and ask prices of the securities. For trading a security on the exchange, it has to be listed on the exchange. The exchange used to be a physical place where the trader and brokers met to trade, but with the advancement in technology, the trading has become largely electronic over time and most of the exchanges now function over the internet. Only few exchanges still have physical trading. Trading online increases the trading volume and efficiency and reduces transaction costs.

The securities can be traded in Over the counter (OTC) markets as well, apart from the exchange. In this market the trading is directly between two parties (buyer and seller). Usually <bonds are traded in this market. On the other hand, in an exchange, the exchange forms the intermediary which buys and sells at quoted prices. This thus increases the liquidity in the market, since a person can sell even when he is not in direct contact with a buyer.

Some examples of Stock exchanges are New York Stock Exchange (NYSE), Tokyo Stock Exchange, NASDAQ and London Stock Exchange.
A stock market is a bigger concept which means a place where securities are traded. A stock market is made up by a number of stock exchanges. For example, the US stock market comprises of all trading on securities listed on NYSE, NASDAQ, Amex and regional exchanges.

A person desirous of buying/selling shares in the market has to first place his order with a broker. When the buy order of the shares is communicated to the broker he routes the order through his system to the exchange. The order stays in the queue exchange's systems and gets executed when the order logs on to the system within buy limit that has been specified. The shares purchased are sent to the purchaser by the broker either in physical or demat format.

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