How Does a Stock Exchange Work?
Those who make a habit of watching CNN or other news channels have already been introduced to the stock exchange, albeit in an indirect way. The symbols that scroll across the bottom of the channel every few minutes are stock symbols. The numbers that accompany the symbols are the current price of those particular stocks, which is an indication of a company’s worth at that particular moment in time. The selling price of stocks varies due to market conditions, inside deals, scandals and even world events, which affect the company’s overall viability. The first practical application of a stock exchange occurred in the early 1600’s, when the Dutch West India Company in Amsterdam made it standard practice to trade their stocks. The British followed suit around the time of the Revolution. Philadelphia had its own stock exchange by 1790, and in the early 1800’s, market investors were meeting at the Curb Stone exchange at the corner of Exchange Place and Broad Street in New York City. In 1934
A company is a ‘legal entity or person’ in its own right. It can be sued or contracted with and it can own businesses or property and carry debts and liabilities. Companies have to trade within the requirements of the law which in N.Z is the Companies Act 1993. The laws are in place to protect the shareholders (owners of the Company) and members of the public who deal with or invest in the Company. The laws control how a company must operate and how it treats shareholders and others. The company can either be privately owned (the public do not have shares in it) or publicly owned (members of the public own shares in it). Only a publicly owned company can sell its shares to the public or allow trading of its shares between members of the public. In reality the company could eventually be owned by thousands of people. Public companies allow the public to buy and sell its shares in a marketplace known as a ‘Stock Exchange’. A public company is a convenient way for businesses to raise fund
Stock exchanges are auction markets…buyers bid how much they are willing to pay, and sellers offer their stock for a price. When there is a match, then a trade is created. If it is done on a trading floor, the traders swap pieces of paper stating how many shares and at what price. If it is on an electronic market, the computer running the market notes those details. Three days later, the buyer delivers the money and gets the stock. The seller delivers the stock and gets the money. Title to the stock is transfered on the companies books.
