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Financial Dictionary - The stock exchange

The stock exchange

The stock exchange (or securities market) may be governed by public or private organisations, which provide everything needed to trade in financial instruments.

There are different trading methods, including auction or continuous trading. There are also different instruments that can be traded, depending on the stock exchange or market in which we are trading, such as equities, debt or derivatives.

Markets are the mechanisms that allow capital to flow from those participants with surplus funds (savers) to those in need of finance (companies). This is what is known as the “primary market”.

It is therefore fair to say that on a global level markets play a hugely important role in each country by influencing the performance of their companies and affording them access to finance that might otherwise be unavailable. No surprise then that stock exchanges are highly regulated, supervised and protected by the relevant public bodies (in the case of Spain, the National Securities Market Commission, or CNMV).

We can differentiate between two types of markets:

Primary markets allow companies to raise funds by issuing shares (or equal units of their value) or debt and then selling them, thus turning the buyers into shareholders (owners of a part of these companies) or into lenders.

Once issued, the securities are traded (bought and sold) by investors and speculators alike in what we might call the “secondary market”, more commonly known among the public as the “stock market”.

Markets rise and fall, depending on whether demand for a given instrument outpaces supply, or vice versa. In other words, if there are far more buyers than sellers for a given security at any time, this surplus demand will push prices upwards, whereas if there are more sellers than buyers, prices will be pushed downwards.

Therefore, prices move according to the supply and demand for each instrument at any given time.

What is a stock exchange order?

To trade on stock exchanges or markets, orders must be entered through exchange members (commonly known as brokers or intermediaries). An order is an instruction that a shareholder communicates to the stock exchange about how many shares he or she wants to buy or sell, and at what price. Other parameters such as validity, or other specific instructions on how we want our order to be executed, must also be set.

Physical or virtual space?

Traditionally, securities were traded in “pits”, or physical places where outcry trading was the norm.

Nowadays, the market is more a virtual space than a physical one. It is essentially an electronic system that receives the buy and sell orders placed by investors, giving rise to a whole system of terminals interconnected with a central one, which executes and then relays information on both executions and price formation, based on the demand, supply and orders placed at any given time.

Many stock exchanges still retain a physical venue, even though they see little to no actual trading.

These spaces have been converted into office space where stock exchange employees carry out part of their work. They are also used as institutional buildings where events such as stock market flotations, mergers and acquisitions and training activities are held.

There are often guided tours around these locations.



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