What is a Stock Exchange? | Definition, Types & Explanation

Stock Exchange market is one of the vitalities of the financial instruments trading. It is the connecting dot to formulate the transactions between the traders that sell financial instruments and the potential buyers. In India, the Securities and Exchange Board of India (SEBI) forms the rules and regulations for the governance of stock markets. The rules are set to keep intact the interest of investors and promote the trading of stocks. But there are certain aspects that one should know about the stock exchange before stepping into one.

This article is curated to give you detailed information about the stock exchange and its related aspects. Have a look!

What is the Stock Exchange?

A marketplace where the trading of financial instruments like bonds and stocks is termed a stock exchange. Usually, the bonds are traded over the counter, but certain corporate bonds can be bought or sold on a stock exchange. With real-time price data, the stock exchanges help the companies to gain capital and investors in making better and more informed decisions. Stock Exchanges can be both an electronic platform and a physical marketplace. People are aware of the trading floor, but now exchanges prefer electronic trading.

What is the Meaning of Stock?

Stocks can be defined as a type of security through which the stockholders get a percentage of ownership in an organisation. Equities is the other name given to stocks.

Why Do People Invest in Stocks?

Capital appreciation is when the price of the stock increases.
Payment of dividends which happens when an organisation gives a sum of its earnings to its stockholders
The liberty to vote shares and be important in a company.

Why Do Companies Open Stocks?

To clear the debts
For the launch of new products or services
Expansion into the new market areas
Increasing the facilities or producing new ones

How the Share Prices are Set?

Share prices are set as per the following categories, which eventually affects the share value:

The Role of Supply and Demand

After commencing the share trading, the prices of shares hugely depend on both demand and supply forces. A company that presents the potential of long-term earnings can get more buyers of its stocks, leading to an increase in its share prices. On the other hand, companies with a weak outlook will get more sellers than buyers, leading to a decrease in stock prices. Usually, when the demand is high, the prices of stocks tend to rise. And the prices of shares drop when there is an increase in the supply, and the number of sellers is more than the number of buyers.

When there is a constant rise in the price of shares, it is called the uptrend, and the continuous downfall in the share prices is called the downtrend. Uptrends that are sustained are termed bull markets, whereas sustained downtrends are called bear markets.

Influence of Market News

Some other factors can cause a change in prices, which could be temporary or sudden. It can be political events, earning reports, companies’ events, and economic news. Know that not all kinds of news and reports will majorly affect the prices of securities.

Instincts of the Herd

What is known as the herd instinct can also be a factor that affects the prices of stocks or shares. Herd instinct is nothing but people’s tendency to follow others’ actions. For instance, when more people buy a stick leading to a rise in the stock price, everyone will come forward and buy those stocks, thinking that the investors would have made the right decision.

There is no concrete technical or fundamental support for the price increase when there is a herd mentality, but then the investors will buy the stocks because others are buying them. While studying behavioural finance, this is one of the studied phenomena.

The Pros of Listing on the Stock Exchange

Helps in Fundraising

By listing the corporate organisations, entrepreneurs get the chance to raise funds for new projects, expansions, acquisitions, and diversifications. The listing provides an exit route for private share investors, and the employees holding ESOPs get the liquidity.

Securities and Its Ready Marketability

With listings, the securities’ ready marketability and liquidity are achieved in a continuous situation while adding an excellent reputation to the companies listed on the stock exchange.

Opportunity to Raise the Capital

The starting listing can help the company gain further capital through various channels like preferential rights issues. Also, it is a chance to attract a broader spectrum of investors.

Controlling and Supervising the Trade of Securities

According to the bye-laws and rules of exchange, the transactions should happen uniformly in the case of listed securities. The stock exchange’s regulation mechanism governs and monitors the transactions in the securities; this is practised to avoid any unfair trading. The small investors become more confident because of it.

Securities at a Reasonable Price

The prices are determined publicly based on demand and supply. Stock exchange quotations are reflective of the security’s actual value. As a result, listing aids in the market’s independent valuation of the company.

Corporate Details is Disclosed Promptly

The company’s listing agreement with the exchange needs prompt disclosure of information about dividends, bonuses, and rights issues, as well as book closing, transfer facilities, and other company-related information. As a result, there will be increased transparency and investor confidence.

Securities’ Collateral Value

Lenders accept listed securities as collateral for credit facilities because capital lenders evaluate them. Publicly-traded corporations can quickly and easily borrow from financial institutions.

The Disadvantages of Listing on the Stock Exchange

Security and Accountability

Companies that the government owns are considered public property. As a result, they are expected to follow the rules of the marketplaces in which they participate. For instance, companies listed on AIM must hire a nominated advisor.

The Possibility of Undervaluation

Not only is issuing shares dilutive, but it can also result in a lack of liquidity. Because there is less demand for the shares, this can affect both fundraising and acquisition efforts. Furthermore, because a lack of demand leads to a low share price, using shares as an acquisition currency will lead to a loss in capital.

Costing

The amount of time and money spent by management on flotation and subsequent listing should never be underestimated. There is a lot of activity to manage, from the process of floating itself, which can take months, to the time-consuming administration of continuous releases.

What is the Best Way to Make Money in the Stock Market?

Following are the best possible ways to make money from your stock market investments:

Know What Type of Trader You Are

There are two types of traders in the stock market: those that follow fundamental investing and those who trade speculatively. The difference between these two types is how they see stock prices. Investors who follow fundamental investing do not emphasize the stock price when compared to speculators. Such traders are more concerned with a company’s fundamental strengths.

Try to Skip the Mentality of Following the Herd

Most of the traders have the mentality of buying or selling stocks as per the experiences of their acquaintances. Thus, if most people are investing in a particular stock, they also go ahead and invest in that stock. One needs to stay away from such practices because they do not yield any profit in the long run. In the words of one of the greatest investors of all time, Warren Buffet, “one should be fearful when others are greedy and greedy when others are fearful”.

The Stock Market is Not to be Timed

When you try to time the stock market, you might lose all your hard-earned money. Many expert investors have suggested that one should not try to time the stock market as this will always be a failed attempt to earn. It is almost impossible to determine a specific stock’s accuracy and top and bottom prices. If you plan to invest in delivery, never go with such strategies.

Keep Discipline Intact in Terms of Investing

When you go through the stock market history, you’ll realise that even the most impactful bull markets have presented panic situations in front of investors. Though the stock markets had bullish trends, several investors have lost their money because of the high volatility of the stock market. On the other, investors who have invested their funds with a disciplined approach have gained excellent returns. If you plan to have a long-term gain, proceed with a systematic approach.

Your Emotions Should Never Influence Your Investments

When investors do not control their emotions, they tend to lose money in the stock market. When there is any bullish trend in the market, investors put their funds in the wrong shares to gain more money. While trading in shares, both fear and greed need control.

Set Up Some Realistic Goals

Traders can make the best from their investment, but setting up unrealistic financial goals can lead to significant losses. You should not expect similar returns from the stock market and always go for realistic financial goals.

Invest Your Extra Funds

There are many stories about people ending indebted because of their shares’ investment. If you are beginning with share trading, always invest your extra funds. Once you start seeing a profit, re-invest the profit and avoid taking any loans or debts for investing.