What is a stock exchange, and how are share prices set?

What is a stock exchange, and how are share prices set?

Trading on the stock market is often confusing for new investors. While it is very profitable, there are so many things to learn. Navigating these murky waters can be really challenging, but if you manage to meet the obstacles head-on, the reward will be worth it.


Even if you know nothing else about stocks, you would know that the stock market is the place where you can trade shares. On the other hand, stock exchanges are secondary markets. Existing owners of shares can make transactions with potential buyers there. But it would be best if you understood that the corporations or companies listed on stock markets do not regularly buy and sell their own shares.


While the companies may engage in stock buybacks, or even issue new shares, these are not usual day-to-day operations. It means that when you buy a share of stock on the stock market, you are buying it from some other existing shareholder and not from the company itself. Furthermore, when you sell your shares, you sell them to some other investor instead of selling them back to the company.


When do the first stock markets appear?


Economists and shareholders created the first stock markets in Europe in the 16th and 17th centuries. They appeared mainly in port cities or trading hubs such as London, Antwerp, and Amsterdam. However, these early stock exchanges were more like bond exchanges because the small number of companies did not issue equity. Most early corporations had to be chartered by their government in order to conduct business. As a result, they were considered semi-public organizations.


Stock markets began appearing in America in the late 18th century. The New York Stock Exchange (NYSE) allowed for equity shares to trade. However, the first stock exchange in America was the Philadelphia Stock Exchange (PHLX). It still exists today.


Since then, stock markets have ushered in an age of regulation and professionalization. They ensure that stock sellers and buyers can trust that their transactions will happen within a reasonable period of time and go through at fair prices. Today, markets are more liquid and more efficient.

stock exchange


What about share prices?


On a stock market, the share prices can be set in a number of ways. However, the most common way is through an auction process where sellers and buyers place bids and offer to sell or buy. A bid is a price at which somebody wishes to buy a share. On the other hand, an offer or ask is the price at which somebody wishes to sell his/her shares. When the bid and ask reach the same number, a trade is made.


Still, there are millions of investors and traders participating in trading on the market. They often have differing ideas about the value of a specific stock, as well as the price at which they are willing to buy or sell it.


The thousands of transactions occur every day as these investors and traders convert their intentions to actions by buying or selling a stock, causing minute-by-minute gyrations in it over the course of a trading session.


Furthermore, a stock exchange usually provides a platform where such trading can be easily conducted by matching stocks’ sellers and buyers. If the average person wants to get access to these exchanges, they would need to have a stockbroker. The stockbroker is the middleman between the seller and the buyer. You can get a stockbroker by creating an account with a well-established retail broker.


The stock market offers the laws of supply and demand, which work in real-time. For example, there must be a buyer and a seller for every stock transaction. The stock price will increase if there are more buyers for a specific stock than there are sellers. On the other hand, if there are more sellers of the stock than buyers, the price will lower.