Methodology

What is a portfolio?

Investing Basics

Module 1

Stock Exchanges Explained

A stock exchange is an organization that acts as the middle man between financial organizations, stockbrokers, and investors. Stock exchanges essentially provide a platform that brings all interested parties together. They allow investors to buy and sell investments, allow companies to list their stock and allow brokers to deal in the market on behalf of their clients.

 

Most investors do not directly deal with a stock exchange, as their stockbroker usually does everything for them. An investor would simply need to log in to their investment account, tell their provider what they want to buy or sell and the broker would do it for them.

 

A lot of stock exchanges are businesses in their own right and it is even possible to invest them. For example, the London Stock Exchange is listed on their own platform. It’s not only possible to buy stocks on a stock exchange, it is also possible to buy and sell other types of investments like bonds, commodities, or precious metals.

How the Stock Market Works

On a stock exchange, there are two different types of market. The first is called the primary market, which is where companies list on the stock market for the very first time. This doesn’t happen very often with companies that are well known, instead smaller companies are usually involved in the primary market. If a well-known company does list via the primary market, it is usually well publicised by the media. For example, in 2019, Uber listed on the stock market via the primary market, which grabbed headlines across most major newspapers or media sites.

 

The second is called the secondary market, which is where investors sell to other investors. Unless an investor subscribes to participate in the listing of a new stock, then they are mostly going to participate in the secondary market. After a company has successfully listed via the primary market, their shares will be bought and sold on the secondary market. Both the primary and secondary markets take place within a stock exchange.

Why Companies List

The main reason why companies list on a stock market is to raise money. Companies typically use the money to grow the size of their business. By listing on a stock market it also allows early-stage private investors to exit the company. They can simply sell their shares in the company and move on. When a company lists on a stock market for the first time, it’s called an ‘initial public offer’, often known as an IPO for short.

 

A key benefit of an IPO for a company is that there is a lot of publicity. This publicity boosts public relations, making a lot of investors excited to invest in the company. Investors should be wary of IPOs, however, as they can be used to create a lot of hype for a company. This hype can artificially push up the stock price of a company to crazily high figures. Weeks later, with the stock price being so high, it can often crash and fall down dramatically. It is not uncommon to see a new stock decrease by 30% in value, in the first 6 months after its IPO. 

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