Most modern market economies have stock exchanges. The activities of the relevant financial institutions involve the fulfillment of a large number of functions significant for the national economy. What are they? What are the main principles of trading on the relevant sites?
What is a stock exchange?
A stock exchange is, in accordance with a common definition, a specialized organization engaged in the organization of trading in various securities. It guarantees the legal legitimacy of transactions, in some cases - the confidentiality of traders and other market players, provides payments to authorized persons for certain compensations, provides bidders with various tools for the sale and purchase of securities.
Stock exchange is an integral attribute of a modern market economy. It allows companies to attract investor funds through the placement of shares in free circulation, and thus increase their own capitalization.
Stock Exchange History
It will be useful to study how stock exchanges came about. The history of the emergence of relevant financial institutions begins, according to modern researchers, from the 16th century. Then the first commodity exchanges appeared in the largest European trading cities. In 1531 - in Antwerp, in 1549 in Toulouse, in 1556 in London. However, the corresponding format of financial legal relations did not immediately become popular, and these exchanges were closed for various reasons.
However, already in 1611, a new exchange opened in Amsterdam, which still operates. It initially traded goods, but over time, securities became the subject of transactions on the exchange. The first, in fact, the stock exchange was the corresponding organization in London, founded in 1773. In 1792, a similar structure was created in New York.
History of stock exchanges in Russia
It can be noted that prototypes of stock exchanges in Russia appeared back in the time of Peter I. In 1789, a decree of Catherine II was issued, which approved the plan for building the Gostiny Dvor in Moscow, under which it was planned to organize the functioning of the exchange. But in fact, this financial institution earned only after the Patriotic War of 1812. By that time, as historians note, the Odessa Exchange, in particular, had already opened - in 1796. In the 19th century, the corresponding format of financial legal relations in Russia was actively developing.
By 1917, there were about 115 exchanges in the Russian Empire. However, the revolution and subsequent events complicated the prospects for the development of the corresponding segment. Exchanges functioned during the NEP, however, in 1930 their activities were discontinued. The restoration of the institution of exchanges in Russia occurred only after the collapse of the USSR. Now in Russia there are several major stock exchanges. Among the most famous - RTS, MICEX. Their establishment is connected with the fact that the stock exchange is, as we noted above, an integral attribute of a market economy. As the national economy of the Russian Federation began to rebuild from a socialist model to a capitalist one, the establishment of appropriate financial institutions was carried out.
In more detail, what expresses the importance of stock exchanges for the state economy, we can consider in terms of the functions that they perform.
The functions of exchanges in the state economy
Modern experts distinguish their following list.
First, the functions of the stock exchange are the accumulation of significant amounts of capital in the national economy. This option significantly affects the investment attractiveness of enterprises operating in the state. However, it is worth noting that capitalization on stock exchanges does not always correlate with the dynamics of GDP. Participants in the stock exchange are traders and entrepreneurs who participate in tenders, primarily, seeking to earn something for themselves. At the same time, their acquisition of certain financial resources may become a factor in their reinvestment in business, and this, in turn, can positively affect the state’s GDP.
Secondly, the stock exchange is an exchange where foreign investors play a significant role. Thus, the relevant financial institutions are of great importance in terms of international economic activities of the state. Statistical indicators of RZB and stock exchanges are, in some cases, significant economic indicators for foreign partners.
Thirdly, stock exchanges are, as a rule, very large organizations that form entire professional communities of traders. Members of the stock exchange are not only companies trading in shares, such may, in principle, also ordinary citizens who have access to the necessary financial instrument for the sale of securities. Thus, the financial institutions under consideration are also a socializing resource, an environment for self-realization of people, and an instrument for ensuring employment of the population.
Stock exchange structure
Now we know that the stock exchange is a financial institution significant for the state economy. Let us now examine what is the specificity of its structure, and what basic processes are carried out during the bidding process. A stock exchange is a place where the purchase and sale of securities is carried out - most often, free shares issued by a private or public company.
Quotes and Indices
Based on how things are on the market as a whole or in a particular business in particular, quotes for the respective shares are compiled. In total, they make up the stock exchange index. This, in fact, is the total indicator of the value of securities traded on the corresponding trading platform. As a rule, this index is formed by the largest issuers of shares, and therefore, on its basis, an investor can evaluate how things are going in a single sector of the country's national economy or the economy as a whole.
What tasks do the organizers of the exchange solve?
As we noted above, stock indices do not always correlate with GDP, but they can provide guidance on the growth prospects of the corresponding macroeconomic indicator. Therefore, compiling a quotation sheet on the stock exchange is a difficult task for financiers, who must, on the one hand, determine the list of the largest companies based on objective criteria, and on the other, ensure that their presence in the exchange index is representative. Specialists in trading operations can be guided by both international standards and norms, and those that reflect the national specifics of transactions with securities.
Drawing up a quotation list on the stock exchange is not the only significant task for financiers organizing the relevant trades. They should also ensure the full legitimacy of transactions, the correctness of the placement of shares, input and output of funds from the point of view of international and national legislation in the field of finance. Thus, the organization of open trading in securities involves the participation of the following major players: stock issuers, traders, financiers, compiling quotation lists, as well as ensuring the legitimacy of transactions for the sale of securities.
Stock Exchange Trading Principles
Let us now consider the basis on which principles trading is carried out at relevant sites. A stock exchange is a market, albeit somewhat localized. That is, the pricing of those goods that are offered on it - in this case, the securities of companies - is based on the ratio of supply and demand for the respective assets. Any administrative regulation of prices on exchanges is not practiced. The company brings its shares to the market, intending to attract investors, first of all, with its own achievements in terms of building a business model.
A stock exchange is an organized market that operates according to certain rules and regulations. In order to enter it, the issuing company must meet a number of criteria, as well as other companies that place securities on the respective trading floors. Traders should adhere to the established norms as well.
Openness as a key attribute of trading
However, the relevant financial institutions, as a rule, try to be as open as possible to investors. In particular, for those who represent foreign countries. The International Stock Exchange is one of the most effective financial instruments for raising capital in the state. Therefore, its founders are trying not to bureaucratize access to bidding for foreign citizens.
How are quotes on exchanges growing?
The next aspect that will be useful to consider is what ensures the growth of stock prices of a company listed on the exchange. We noted above that the financial institutions under consideration are completely market structures that practically exclude the influence of the administrative factor on pricing mechanisms. A stock exchange index is an indicator that reflects an investor’s interest in placing funds in the shares of certain companies, and not any other. But how does a trade determine whether investments are reliable? And at what point does he decide to sell the acquired shares?
A large number of factors play a role here.
Firstly, the published data on the state of affairs in the business of the issuing company are taken into account. This can be financial statements, audit results, analytical articles related to evaluating the effectiveness of a business model of a company.
Secondly, macroeconomic indicators are a very significant guideline for the trader. If the investor sees that the state of affairs in the national economy of the country in which the issuing company operates is far from ideal, he can decide to sell the shares of all or most of the firms in this state.
Thirdly, a significant aspect of the decision-making of a trader on the acquisition or sale of securities is the political situation in a particular region. The sudden change of power in the state or the emergence of tension in relations with neighbors is a factor in the fact that the investor may revise his assessments of the prospects for investing in shares of firms operating in a particular country.
What is the motivation of traders and issuers on the exchange?
Let's study another aspect of the work of stock exchanges - motivational. Actually, what motivates issuing companies and traders seeking to participate in securities trading? The activity of the stock exchange is, first of all, the organization of the legitimate interaction of the investor - a person who seeks to maintain and increase his capital, and a commercial enterprise, which, in turn, wants to increase its own turnover, develop new industries, ensure brand awareness on the national and overseas markets. Both parties, of course, are primarily interested in making a profit, and this is their main motivation.
Are stock exchanges legal?
Among traders, it is often believed that the stock exchange is a hoax, and transactions on the sale of securities are extremely rarely profitable. However, as we noted above, the organizers of securities trading, above all, provide just the same full legitimacy of the transactions, give the relevant mechanisms as much transparency as possible. Therefore, it is not necessary to talk about deception here, but only a competent trader is often able to verify this. Which, investing its funds in securities, is aware that losses may occur if quotes are reduced. As well as the appearance of tangible profits, if the purchased shares of the company grow in value.