What is the stock market? What is the stock exchange? How does it all work?

Everyday, stocks are exchanged and traded in numerous stock markets around the world. The liquidity they bring are a vital component of economic growth. However, we seldom stop and think about the vital role that a stock exchange plays. I have listed some of the major things that are facilitated by the stock exchange.

What is a stock exchange?
Simply put, stock exchanges are open markets that trade in financial assets. Whether associated with a company or acting as an individual, a stock exchange is the place where stocks are bought and sold. There are a number of major stock exchanges around the world and each of these plays a part in determining the overall economic condition. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.

What is the role of a stock exchange that makes it vital to an economy?
The main function of a stock exchange is to facilitate the transactions associated with both buying and selling of securities. Buyers and sellers of shares and stocks can track the price changes of securities from the stock markets (derivatives, equity etc.) in which they operate.
Also, stock exchanges have multiple roles in an economy which make it vital. These roles include:

• Raising capital for businesses (IPOs)
• Mobilizing savings for investment
• Facilitating company growth and corporate governance
• Profit sharing
• Creating investment opportunities for small investors
• Government capital-raising for development projects
• Acts as a barometer of the economy

How does a stock exchange operate?
With the help of stockbrokers, the buyers and sellers participating in a stock market carry out their transactions. In simple terms, the brokers representing selling parties take their orders to the stock exchange floor and then find brokers representing parties willing to invest in similar stocks. If both parties agree to trade at the fixed price, the transaction takes place.

What are the requirements to trade in a stock exchange?
Companies have to meet the requirements of the exchange in order to have their stocks listed and traded, but requirements vary by stock exchange. However, the common requirements are that to be able to trade a security on a certain stock exchange, it has to be listed there and trading is done by members only.
For example, Bombay Stock Exchange (BSE), has requirements for a minimum market capitalisation of ₹25 crore ($4m) and minimum public float equivalent to ₹10 crore ($1.66m).

What are the benefits and drawbacks of listing your company on a stock exchange?
Going public is not an easy task. In deciding whether to seek a listing, a company should consider the alternative financing needs available and the benefits versus the drawbacks of listings.
Benefits

• Creating a market for the company's shares
• Enhancing the status and financial standing of the company
• Increasing public awareness and public interest in the company and its products
• Accessing to additional fund raising in the future by means of new issues of shares or other securities
• Facilitating acquisition opportunities by use of the company's shares
• Offering existing shareholders a ready means of realizing their investments

Drawbacks
While there are benefits to going public, it also means additional obligations and reporting requirements on the companies and its directors:

• Increasing accountability to public shareholders
• Need to maintain dividend and profit growth trends
• Becoming more vulnerable to an unwelcome takeover
• Need to observe and adhere strictly to the rules and regulations by governing bodies
• Relinquishing some control of the company following the public offering