The notion of Stock exchange

  A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. It also provides facilities for issue and redemption of securities and other financial instruments.  Securities traded on a stock exchange include shares issued by companies, trusts, derivatives, pooled investment products and bonds.

Functions. Stock exchange is an important element of every economy. It performs many functions for growth and development of the economy:

 (1) Determination of Share Price: The prices are affected by the forces of demand and supply. It is the place where these forces meet each other to establish price of a share. This price then shows the strength of a company in the market.

(2) Development of Capital Market:  The capital market has two segment i.e., non-securities market and securities market. It is a developed form of this securities market. Active stock exchange helps in better growth of capital market. It also provides a medium in which different instruments of capital market can be easily traded.

(3) Generation of Savings: Stock market teaches people to save and then to invest savings in right direction. Higher savings potentials increase the rate of capital formation in the country.

(4) Mobilization of Resources: It channels savings in different sectors. Then it turns savings into investment. Efficient mobilization of resources leads to increase in production and improvement of living standards.

(5) Healthy Corporate Structure: It is a source of promotion for sound and healthy companies. It has its particular set of rules and regulation which are to be abided by all the listed companies.

(6) Financial Stability: Trends in stock exchange affect all major sectors of the economy. That is why the governing authorities (Security and Exchange Commission) always keep a close eye on the conditions of stock exchange.

Participants

  Broker-dealer  It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers.

Floor broker is an independent member of an exchange who can act as a broker for other members who become overloaded with orders, as an agent on the floor of the exchange. 

 Floor trader is a member of a stock or commodities exchange who trades on the floor of that exchange for his or her own account. The floor trader must abide by trading rules similar to those of the exchange specialists who trade on behalf of others. 

 Investor is someone who allocates capital with the expectation of a financial return. The types of investments include, — equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc. 

 Market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn.

 Stock trader refers to a person or entity engaging in the trading of equity securities, in the capacity of agent, hedger, arbitrageur, speculator, or investor. The majority of stock traders are technically stock speculators, synonym stockjobbers. 

The largest stock exchanges

NYSE. The New York Stock Exchange is the world's largest equity market, which listed companies are the world’s biggest and best. They range from 'blue-chip' companies to young, high-growth corporations. There are 2,800 companies listed! The NYSE is therefore home to some of the most famous brands and companies - those that we all use the products and services of every day. The NYSE has to maintain very high standards of ethics and conduct at very competitive prices. 

AMEX. AMEX is an American multinational financial services corporation headquartered in Three World Financial Center, Manhattan, New York City, New York, United States. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best known for its credit card, charge card, and traveler's cheque businesses. Amex cards account for 24% of the total dollar volume of credit card transactions in the US.

NASD.  The National Association of Securities Dealers was a self-regulatory organization of the securities industry responsible for the operation and regulation of the Nasdaq stock market and over-the-counter markets. It also administrated exams for investment professionals, such as the Series 7 exam.  
 The NASD watches over the Nasdaq (National Association of Securities Dealers Automated Quotations) to make sure the market operates correctly. In 2007, the NASD merged with the New York Stock Exchange's regulation committee to form the Financial Industry Regulatory Authority, or FINRA.  
OTC. A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.

The Big-band reform

  It refers to the major changes in the operations of the LSE which come into effect on 27 October 1986.1) The system of minimum commissions on LSE transactions was ended.2) The single capacity system was ended to dual capacity system.3) The gill-edged securities market was freed up to allow greater competition.

European stock markets – general trend

  Competition among Europe’s securities exchanges is fierce. Yet most investors and companies would prefer fewer, bigger markets. If the exchanges do not get together to provide them, electronic usurpers will. There are 12 member countries of the EC but it is not as integrated as the US.

  European exchanges armoured themselves for battle in 3 ways. The first was to fend off foreign competition with rules. The second response to competition has been frantic efforts by bourses to modernize systems, improve services and cut costs, which meant investing in new trading systems.

  Such competition-through-diversity has encourage European changes to cut out the red tape that protected their members from outside competition, to embrace electronics, and to adapt themselves to the wishes of investors and issuers.

  So the third response of Europeans bourses to their battle has been pan-European cooperative ventures that could anticipate a bigger European market.

Trading on the Stock exchange floor

  Floor trading is where traders or stockbrokers meet at a specific venue referred to as a trading or pit to buy and sell financial instruments using open outcry method to communicate with each other. These venues are typically stock exchanges and transactions are executed by members of such an exchange using specific language or hand signals.

Few exchanges still have floor trading. One example is the NYSE. That means that the traders actually form a group around the post on the floor of the market for the specialist, someone that works for one of the NYSE member firms and handles the stock. Just like in an auction, there are shouts coming from those that want to sell and those that want to buy. The specialist facilitates in the match and centralizing the trades.

The notion of Stock Exchange

Plan

1. The definition of  the Stock Exchange
2. Major functions and activities
3. Participants of the Stock Exchange
4. The largest Stock Exchanges (NYSE, AMEX, NASD, OTC)
5. The Big Bang reform of the LSE
6. European stock markets – general trend
7. Trading on the Stock Exchange floor