The stock exchange as a marketplace
Having a marketplace in which to buy or sell something makes life a lot easier. The same applies to stocks.
A stock exchange is an organisation that provides a marketplace in which investors and borrowers trade stocks. It also sets rules and regulations to ensure that the stock market operates efficiently and fairly for all parties involved.
The stock exchange as two different markets
Firstly, the stock exchange is a market for issuers who want to raise equity capital by selling shares to investors in an Initial Public Offering (IPO). The stock exchange is also a market for investors who can buy and sell shares at any time.
Trading shares on the stock exchange
As an investor in the UK, you can't buy or sell shares on a stock exchange yourself. You need to place your order with a stock exchange member firm (a stockbroker) who will then execute the order on your behalf.
The London Stock Exchange (LSE) is the leading stock exchange in the UK. Trading is done through two computerised systems known as SETS and SEAQ.
The trading process
If you decide to buy or sell your shares, you need to contact a stockbroker who will buy or sell the shares on your behalf. After receiving your order, the stockbroker will input the order on the SETS or SEAQ system to match your order with that of another buyer or seller. Details of the trade are transmitted electronically to the stockbroker who is responsible for settling the trade. You will then receive confirmation of the deal.
Types of shares available on the stock exchange
You cannot trade all stocks on the stock exchange. To be listed on a stock exchange, a stock must meet the listing requirements laid down by that exchange in its approval process. Each exchange has its own listing requirements, and some exchanges are more particular than others.
It is possible for a stock to be listed on more than one exchange. This is known as a dual listing.
Most exchanges have different segments on which a stock can be listed. For example, there may be an official trading list for larger companies who meet the most stringent listing requirements of the exchange, as well as an alternative market for those companies who fail to meet the requirements for the official list.
This diversity means you can be an active investor in different market segments, depending on your own personal preferences and investment objectives. For example, if you prefer to minimise risk, you may want to restrict your trading to those stocks quoted on official trading lists.