A stock exchange enables to trade securities and other financial instruments, including derivative instruments: options, futures, swaps, swaptions, credit derivatives that, as a rule, are a certain contract.

Such things as securities issue, their redemption and other arrangements on change of capital structure, for example, payment of income and dividends are usually carried out there.

Among the securities traded on a stock exchange are stocks of companies and mutual funds, and other investment products, such as government and corporate bonds.

As a rule, there is a certain central office on a stock exchange, where transactions are recorded. However, trade is less and less linked to one or another physical place nowadays. Modern markets are electronic networks that allow to increase speed and to decrease costs. Trade on an exchange is by members only, brokers that have the so-called “brokerage places” are allowed to trade there (the Tokyo Stock Exchange

(TSE)).

Stock exchange is the major component of stock market.

However, it is non-obligatory to issue secur ities via a stock exchange and then to trade them. Such trading is called “off exchange”.

According to the definition, the offering of securities to investors is called the primary market, and the subsequent trade is done in the secondary market.

More and more securities are traded on the international stock market.

The supply and demand at the stock market depends on various factors that define the securities price on free markets.

How do the trades occur ? You had to hear about “stocks trade” for certain. Actually, it goes not about usual commercial transactions, but about the transactions of buying and selling. It is
non-obligatory to know all technical details of securities buying and selling.

However, it is important to have a basic idea of how the market works.

The basic methods

A stock exchange uses two basic methods:

* Voice trade in a trading floor
* Electronic trades

There is a tendency of moving the trades into the networks and refusal of trading floors nowadays. Nevertheless, there is also an opposition to th is tendency.

The majority of markets, especially NASDAQ, conduct the electronic trades. However, futures contracts are traded on a floor on some stock exchanges.

Trading floor (”hole”)

Owing to TV, the trading floor of the New York Stock Exchange (NYSE) occurs to the majority of people at once.

Hundreds of people passing to and fro, shout and show each other signs, do the phone calls, look in the computer screens, enter the data in business hours.

It is difficult to imagine greater chaos.

And still, by the end of the day, the greater part of transactions comes to an end and the traders go home. Here is an algorithm of the simple order performance on the New York Stock Exchange.

1. You ask your broker to buy 100 stocks of the company “X”.
2. The broker passes the order to the clerk in a trading floor
3. The clerk passes the order to the trader, and he finds another trader, who wants to sell 100 required stocks.

It is even easier, than it seems to be, because the traders in a “hole” know the specialization of each other.
4. The traders arrange for the price and finish the transaction.

The notice about this goes back by chain and the broker informs you about the final price. All the process can occupy some minutes, depending on

the paper or the market. In some days you receive the acknowledgement by mail.

Electronic trades

Someone is already asked a question how long the system similar to NYSE would be able to function effectively in our world of high speeds.

Only a small part of its transactions is carried out through electronic system. All the operations on competing NASDAQ are electronic.

Electronic markets use huge computer networks and select buyers and sellers.

This system lacks romantics of a trading floor.

However it is fast and effective. Many establishments participating in trades, for example, pension funds, mutual funds, etc., prefer this very method.

The broker is necessary for the investor all the same as a private person has no access to the electronic market. The broker enters the trading network and the system finds the buyer or the seller depending on the received order. However, you can watch the trades almost constantly.