What Is The Stock Exchange? And How Does The Stock Trading Work?

What Is The Stock Exchange?

Next to trade and the stock exchange, another important factor in modern trading, which warrants some review of its history, is the concept of currency. Introduced as standardized money, designed to facilitate a wider exchange of goods and services in trading centers, the earliest currencies were metal used to represent stored value. Symbols were used to represent commodities and formed the basis for trade in the Fertile Crescent for more than 1500 years.

Although the very first coins were nothing more than unmarked lumps of precious metals such as copper or gold, the Ancient Spartans minted coins from iron to discourage Spartan citizens from engaging in foreign trade.

Well into the eighteenth and nineteenth centuries, there was a strong balance. It’s interesting to consider the unlikely resemblance that trading today bares to trading in prehistoric times right the way up to, say the 18th or 19th centuries. Trade and commerce are deeply rooted in communication, and these practices brought about many major developments and changes to the way human beings live and interact.

Today, trading and the numerous stock exchanges around the world have a major role to play in driving the world economy. While you don’t need to know much about the larger implications of a day’s trading to take part yourself, if you want to start to develop a sophisticated read of the market, understanding the larger role of trading is the way to begin.

Consider for a moment the roles of the stock exchange:

To raise capital for businesses:

The Stock Exchange provides companies with the means to raise money for a variety of purposes. Most companies use the stock exchange to raise capital for expansion, by selling shares to those who would like to invest.

To mobilize savings for investment:

When people invest their savings in shares, stocks, or even bonds, it leads to a more rational allocation of resources. Money funds, which could have been kept in banks, are mobilized and redirected to promote business activity and economic growth.

To facilitate company growth:

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase market share, and acquire other necessary business assets.

To redistribute wealth:

By giving a wide spectrum of people a chance to buy shares and therefore become part-owners (also called shareholders) of profitable enterprises, the stock market may help to reduce large income inequalities. However, capital losses may also happen. Both casual and professional stock investors, through stock price increases and dividends, get a chance to share in the profits of promising business that were set up by other people.

To improve business and corporate standards in general:

A wide and varied scope of owners tends to improve on the management standards and the efficiency of companies. Shareholders generally help to impose higher standards from companies, and their demands tend to compound with the rules for public corporations imposed by public stock exchanges and government.

To create investment opportunities for small investors:

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore, the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors, and to enjoy similar rates of return.

To help governments raises capital for development projects:

Governments at various levels may decide to borrow money in order to finance infrastructure projects, such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government.

The issuance of such municipal bonds can prevent the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

How Does The Stock Trading Work?

The stock exchange and the volume of trade in a day also give a strong indication of the state of the economy. Stock exchanges, the prices of shares, etc, are sometimes called barometers of the economy. At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or stay when companies and the economy are generally stable and growing. Conversely, economic recession, depression, and financial crisis, if these conditions become sufficiently extreme, may eventually lead to the crash of a stock market, at which point the value of shares collapses.

Most of the top traders, whether they do stock trading, bonds, or futures; whatever it is they are trading, they tend to have a great grasp of the small and the big picture. The very best traders stay current with company news and general developments, but they also have a good grasp upon the wider implications of the markets and trading for the economy.

Looking at both the micro and the macro, the best traders are able to pick up on trends and developments to make prudent decisions about their trades in both the long term and the short term. If you want to make a sizeable income from your day trading, or if you want to eventually become a professional stock trader, imitating the very best traders should be your objective.