What is a Stock Exchange?

A stock exchange is an organisation that provides a marketplace in which to trade stocks. It also sets rules and regulations to ensure that the stock market operates both efficiently and fairly for all parties involved.

The stock exchange operates as two different markets:

  • Firstly, it is a market for issuers who wish to raise equity capital by offering shares for sale to investors in an IPO (i.e. a primary market)
  • It is also a market for investors who can buy and sell shares at any time, without directly affecting the entities in which they are buying the shares (i.e., a secondary market)

How does it work?

As a retail investor, you cannot buy or sell shares directly on a stock exchange such as the London Stock Exchange (LSE). You must place your order with a stock exchange member firm who will then execute the order on your behalf. You can begin by simply setting up a Trading Account.

You cannot trade all stocks on the stock exchange. This is because some stocks are unlisted and are only traded in the over-the-counter market (OTC/the ICAP Securities and Derivatives Exchange).

To be listed on a stock exchange, a stock must meet the listing requirements laid down by that exchange in its approval process. Each exchange has its own particular listing requirements; some are more stringent than others.

It is possible for a stock to be listed on more than one exchange. This is known as a dual listing. A dual-listed stock can sometimes provide you with more liquidity; a dual listing on exchanges in different time zones will increase the hours during which you can trade the stock.

Most exchanges have different segments on which a stock can be listed. For example, there may be an official trading list for larger companies who meet the most stringent listing requirements of the exchange, as well as an alternative market for those companies who fail to meet the requirements for the official list.

This gives you the opportunity to be an active investor in different market segments, depending on your own personal preferences and investment objectives. For example, if you are a particularly risk-averse investor, you may wish to restrict your trading to those stocks quoted on official trading lists.