A stock exchange, in simple terms, is an intermediary between organisations, brokers and investors. Stocks are not owned by stock exchanges, they are simply traded from one party to another.

Stock exchanges are centralised platforms that bring all interested parties together. They allow companies to sell financial instruments, which can then be offered to investment banks, brokers or individual investors.

As a result, stock exchanges allow companies and governments to raise capital, whether it’s through the sale of stocks, bonds or derivatives.

It is also possible to trade other financial instruments on stock exchanges, like commodities or precious metals.

A lot of stock exchanges are businesses in their own right and it is even possible to buy stock in them. For example, the London Stock Exchange is listed as part of the FTSE100 index.

The primary market

When it comes to stock exchanges, there are two distinct markets, the primary market and the secondary market.

The primary market is where financial instruments are sold for the first time. It’s called the primary market because investors are buying financial instruments directly from a company.

This means that if you buy a financial instrument for $50, that $50 will go directly to the company.

This is essentially where companies come to raise capital for their business by selling directly to investors.

For instance, a company may need to borrow money to pay for a new project. Therefore, they may decide to issue a bond on the primary market.

Investors that buy a new bond issue will be giving their money directly to a company as a debt obligation.

When a company decides to sell stock (ownership) in their company to outside investors, they do this on the primary market too. This is called an Initial Public Offering (IPO).

It is often not advisable to buy stock during an IPO because the stock is unproven and it is therefore uncertain how market forces will react to the stock.

It is not uncommon to see a stock decrease in value in the weeks following the IPO. You have to be careful because IPO’s are sometimes used to make big returns for early stage investors, at the expense of new investors.

The secondary market

The secondary market is where investors sell their stake in a financial instrument to other investors.

In this market, the company doesn’t make any money from the buying and selling of it’s stock. All of the money is made by a company in the primary market when the financial instrument is first issued.

A company can buy back it’s own stock from the secondary market but it isn’t common for a company to start buying and selling it’s own stock in the secondary market.

The reason is that companies follow strict compliance rules regarding market manipulation and that they have to be careful in terms of managing shareholder communication.

It wouldn’t look good if a company was buying and then selling it’s own stock. In fact, if a company sold it’s own stock on the secondary market, it would imply that the stock is overvalued and that nothing good is on the horizon.

As mentioned, it’s almost impossible for a company to do this, which is why it’s more important to keep an eye on the activity of the senior management of a company. Many investors pay a lot of attention to the buying and selling activities of the CEO or other executives.

Aside from stocks, when investors buy a bond on the secondary market, they are buying the bond from another investor. The principle of the bond would have already been paid to the company by the original investor.

For instance, if investor A bought a bond on the primary market for $1000, investor B could buy that bond from investor A for $1000. The company would keep the original $1000 from investor A, who would get $1000 from investor B instead. Investor B would then take over as legal ownership of that bond.

 

What are the main stock exchanges?

The largest stock exchange in the world is the New York Stock Exchange, which is home to a long list of companies that are worth $25.53 trillion in total.

The New York Stock Exchange has listed companies like Alibaba, Berkshire Hathaway, JP Morgan, Visa and Walmart.

The NASDAQ is the second largest stock exchange in the world, focusing more so on technology companies like Apple, Microsoft, Google and Amazon.

Other important stock exchanges include the London stock exchange, Japan Exchange Group, the Shanghai Stock Exchange, Hong Kong Exchanges, Euronext and the Shenzhen Stock Exchange.

It may not be possible to buy stock from every stock exchange with the same broker. It largely depends upon the presence that your broker has with the different stock exchanges around the world as well as the relationships they have with different investment banks.