How a Stock Exchange work
Updated: Aug 30
First, we will define what a stock exchange is, it is a marketplace where stocks are to be
bought or sold throughout the opening times of a stock exchange. That’s the simplest definition out there.
A much more detailed one would be, it is a marketplace where securities such as Stocks and Bonds are traded. Trading meaning bought and sold.
Examples of stock markets would be:
New York Stock Exchange: The New York Stock Exchange (NYSE) requires a company to have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years.
NASDAQ Stock Exchange: NASDAQ requires a company to have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years.
London Stock Exchange: The London Stock Exchange (LSE) the main market of the LSE requires a minimum market capitalization (£700,000) and three years of being audited
Purpose of A stock exchange:
Companies that are publicly listed on an exchange are required to conform to reporting standards that are regulating bodies. The actions of a company’s management are always under scrutiny and usually affect the value of a company. This in return helps ensure that they make decisions that benefit the shareholders whilst acting efficiently
Exchanges facilitate economic efficiency through the allocation of capital. Individuals also get a pathway to participate and invest their cash instead of keeping their funds saved up in a bank account. Exchanges provide liquidity as it gets easy to sell one’s shares. Since real-time market share prices, the stock exchanges also encourage an efficient market thus allowing investors to decide the value of companies.
Listing requirements for stock exchanges
But first We’ll start on the Objectives of Listing and these are:
To enable ready marketability and liquidity of a company’s securities
To provide free negotiability to stocks
The interests of shareholders and investors can be protected
To provide a mechanism for effective control and supervision of trading
A company that desires to list its shares on the stock exchange has to comply with the following requirements:
Permission for listing should have been provided for in the Memorandum of Association and Articles of Association.
The company should have issued for public subscription at least the minimum prescribed percentage of its share capital (49 per cent).
The prospectus should contain necessary information concerning the opening of the subscription list, receipt of share application, etc.
Allotment of shares should be done fairly and reasonably. In case of oversubscription, the basis of allotment should be decided by the company in consultation with the recognized stock exchange where the shares are proposed to be listed.
The company must enter into a listing agreement with the stock exchange. The listing agreement contains the terms and conditions of the listing. It also contains the disclosures that have to be made by the company continuously
Thank you for taking some time off to read this article, I tried to keep everything as simple as possible.
For education on trading, I recommend The One Percent Trading Group, and I’d like to thank them for contributing to the trading community.
Their YouTube channel that has free content: https://www.youtube.com/c/OnePercentTradingGroup