Stock market: How do exchanges work and why are they needed?

The first exchanges appeared in Europe in the 15th century - they traded mainly bills and goods. Exchanges that trade exclusively in securities appeared a century later. Now many investors are looking for investment opportunities that can bring greater income than deposits. In this regard, the stock market is becoming more popular, but many are still wary of it. In this article, we will look at how the stock exchange works and what every investor who wants to start trading on it needs to know.

Types of activities of exchanges

If we describe the types of activities of exchanges, we can say that they are all united by one goal - trading is carried out here. Exchange participants make a profit by trading. They can play for an increase in price (long position) or for a decrease in price (short position). Players who profit from price increases are called “bulls.” Those who play short are called “bears”.

To understand the features of the exchange, you should gain experience in this area. But theoretical knowledge is also very important. They can be gleaned from specialized literature.

Scheme of work

When they talk about exchange activities, they mean a common goal - trading operations are carried out here. Exchange trading participants carry out transactions and make a profit. They play both on rising prices (long positions) and on falling prices (short positions). Before the computer era, transaction agreements were conducted orally. Currently, most trading operations are carried out electronically using special programs.

Brokers submit orders for the purchase/sale of assets to trading systems. Other traders place counter bids. Executed transactions are recorded, implemented, organized, and settlements are guaranteed and the interaction of deliveries and payments is ensured. Exchanges charge commission fees on every trade made, and this is their main source of income. In addition, sources of profit can be membership fees, fees for access to trading and the sale of information.

New York Stock Exchange

The main functions of exchanges are:

• provide a place for trading (provide a meeting between buyer and seller);
• organize exchange trading;
• establish trading rules, including standardizing goods sold at auction;
• develop standard contracts;
• establish quotes, that is, the cost of the goods, which is announced by the seller and buyer and at which they make a transaction;
• regulate disputes (arbitration);
• engage in information activities;
• provide certain guarantees for the fulfillment of obligations of those participating in the auction.

Types of modern exchanges

All exchanges can be classified depending on the values ​​that are used when performing exchange transactions. The types of modern exchanges are based on the types of values. The following values ​​can be used as objects of trading operations:

• Useful resources - gas, oil, ores;
• Securities and shares of various enterprises and banks;
• Bank checks and currencies of different countries;
• Products of everyday consumer demand - raw materials, food products;
• Information Technology;
• Electronic money (cryptocurrency);
• Intellectual property objects;
• Precious metals and precious stones (gold, diamonds, platinum);
• Cash debt obligations (bonds).

Types

Based on the degree of government intervention in exchange activities, there are three types of exchange trading:

The exchange does not conclude any purchase/sale transactions. Transactions are concluded by professional intermediaries (brokers). Entrepreneurs have the opportunity to conduct trading operations only with the help of brokers. The value of assets is determined by an open clash of supply and demand of those participating in the auction.

Depending on the degree of participation of visitors in trading, exchange trading can be:

• open (in addition to brokers, visitors can also sign contracts);
• closed (only brokers take part in trading).

Exchanges are divided by product range into:

1. Universal, trading a wide range of different products.
2. Specialized, which specialize in a specific product.

In addition, exchanges are classified according to the characteristics of their activities and the degree of participation in international trade, and can be international or national. International markets serve certain world markets. Exchange operations are carried out by representatives of business circles of different countries. The international activities of exchanges are ensured by the currency, trade and tax regimes of the countries where they are located.

By the beginning of the 20th century, exchanges were classified into 4 types:

All these types of exchanges have their own characteristics. But they are united by the fact that they help improve and facilitate market relations, regulate and streamline (written and unwritten rules) active market agents, and facilitate the transfer of capital. In addition, they act as indicators of market orientation.

Currency exchanges

On currency exchanges, operations are carried out for the free sale and purchase of currencies of various countries on the basis of quotations - exchange rate ratios. The foreign exchange exchange belongs to the category of the most liquid exchanges. The ratio of exchange rates on the foreign exchange exchange (quotes) largely depends on the economic situation in the issuing countries and is a reflection of the purchasing power of the currencies. On currency exchanges, the process of establishing the real market rate of a particular national and foreign currency takes place. All currency exchanges are legal entities and important elements of the foreign exchange market infrastructure.

Controls

For the successful functioning of the exchange platform, it must inspire trust on the part of all its participants. One of the necessary conditions for this is democratically elected governing bodies.

• The highest legislative body of management is the general meeting of exchange members. It meets in full at least once a year.
• To resolve less significant operational issues, there is an exchange council - a control and administrative body that deals with the activities of the trading platform;
• For operational management on a day-to-day basis, as well as representing the interests of the financial institution in interaction with other persons from among the council members, a board is elected.

The activities of all of the above structures are strictly regulated by the charter of the exchange platform.

• The Audit Commission is also elected by the Exchange Council. By the annual meeting of the highest legislative body of the site, this commission is obliged to conduct a documentary audit of all financial and economic transactions and provide a report to the council, as well as exercise ongoing control over the finances of the exchange.

Commodity exchanges

Commodity exchanges are markets that operate on a regular basis, where goods with certain characteristics are wholesaled. The principle of pure competition operates on the commodity exchange, and all goods are easily replaceable due to their homogeneity. At the moment, there are about 100 types of exchange goods, which belong to different groups - raw materials (energy or industrial), metals, textile raw materials, food products, etc. Depending on the product being sold, commodity exchanges can be specialized (narrow product focus) or universal.

Stock exchanges

Stock exchanges carry out trading of securities, so they are the most important financial institution supporting the securities market. Stock exchanges provide a place for both the initial sale of securities and their subsequent resale. Through trading on stock exchanges, there is a natural regulation of the securities market and ensuring the liquidity of financial investments. Lists of the largest stock exchanges are regularly updated based on their market capitalization. Both dealers and brokers can participate in trading on the stock exchange and make transactions.

Risks in financial markets

Exchange trading involves many risks - from geopolitical ones to the release of regional news. They influence price movement. The trade war between China and the United States could trigger price movements for a number of global companies. Activities of legislators at the local level - regional players. This happened with Yandex shares on October 11, 2019. On news from the State Duma, securities fell by 18% in one day.

Cryptocurrency exchanges

Cryptocurrency exchanges are electronic trading platforms where electronic banknotes are exchanged for other electronic currencies or for government currencies of various countries. With the help of cryptocurrency exchanges, electronic currency can be exchanged for real currency or a larger amount can be obtained in another electronic currency. All cryptocurrency exchanges are divided into two main types:

• Exchanges that conduct transactions exclusively in Bitcoin and major forks;
• Exchanges where transactions are also carried out between bitcoins and their forks and world national currencies.

Advantages and disadvantages

Advantages of access to trading for an ordinary individual on the exchange platform:

1. The benefits of investing with minimal time investment. In the long run, all markets grow. You can create an investment portfolio yourself or with the help of professionals, using the formed portfolio of investment companies as a basis. The composition of assets is often deciphered.
2. You can make money both from dividends and from the growth in asset values.
3. For investments, the market offers different instruments with different risks - from weather futures to shares of global brands and real goods.
4. Many assets are traded around the clock, with breaks on weekends and holidays.
5. There are no requirements for the investor. In addition, he must invest his own money. No one cares about age or having a higher education. This is a field for everyone.
6. To become an investor or day trader, you don’t need to sit in an office or constantly be in one place or one country. All you need is a smartphone or laptop and Internet access.

There is only one minus. As a business, investing can bring not only income, but also losses.

Labor exchange

The labor exchange is a state intermediary structure between the hired labor force and employers. The labor exchange is a mechanism operating in the labor market and regulating certain of its processes. With the help of the labor exchange, the state influences the existing unemployment in the labor market and promotes the employment of persons who find themselves temporarily unemployed. An important element in the activity of the exchange is the study of labor demand and its structure, as well as analysis of the supply available on the market. The functions of the labor exchange also include maintaining statistics and paying unemployment benefits.

Stock psychology

Trading on the stock exchange requires a certain psychology, understanding of which is the key to successful activity in the stock market. The key to success on the stock exchange can be a combination of such qualities as the ability to have strict control over one’s emotions and a clear understanding of the motivation for one’s actions. An experienced and successful broker is guided by a clear plan and reasonable analysis, which is suggested by stock market psychology. A disastrous strategy in playing on the stock exchange is to rely on greed, gambling excitement and passion, as well as irrational expectations. Fear is also a dangerous emotion - it can both push into rash transactions and paralyze actions.

Advice from Sravni.ru:
To play on the stock exchange and make money here, you will have to use the services of a broker. There are large companies that provide such services. The principle of leverage or financial leverage is used here, when the amount you invest is proportionally increased by the broker so that you are able to trade. Payment of profits is also carried out in predetermined proportions.

Specialized units

In the most general form, they can be divided into commissions and commercial organizations. Let's look at some in more detail.

• The Arbitration Commission deals with the resolution of all disputes that arise between the parties in the process of concluding transactions and executing operations. Acts on behalf of the exchange and is an impartial party to the conflict;
• Listing commission - the work of this unit is limited to preventing the circulation of financial assets and securities of unreliable issuers;
• Quotation commission - employees of this department keep records of securities, recommend their starting price when they are first put up for auction, and also record changes in the value of financial assets and provide information on quotes for free access;
• Clearing commission - is responsible for post-trade operations, deals with mutual settlements, keeps records of debt on securities of each person and organizes direct settlements between the selling and buying parties.
• Information and publishing department – ​​produces directories, brochures, advertising brochures and other information publications;
• Technical Support Department - is responsible for the stable operation of all software and the functioning of other departments, promptly eliminates problems that arise and tries to ensure uninterrupted operations.