Global Market Trading
Equities issued by public companies, such as company stock or shares, are traded globally via central stock exchanges such as the London Stock Exchange and NYSE. Stock exchanges, therefore, are a vital component of the world marketplace for traders, investors and the wider public.
We’ll take a detailed look into the role of the stock exchange, their significance in the world of trade and the requirements for listing.
The role of stock exchanges in capital formation
At their core, stock exchanges can be viewed as a means for companies to raise money. As such, companies list their stock for public trading, essentially seeking funds to enable their business to grow. This capital is then invested and can help pave the way for more job opportunities and economic growth.
The process of making shares available to the public is known as initial public offering or IPO. Although there are many steps involved in this process, it offers a way for companies to increase their exposure and allows opportunities to create significant capital.
It also opens up early opportunities for individual investors that are able to capitalise on stock and potentially make huge gains in the future.
Trading mechanism: auction vs. order-driven markets
Trading mechanisms refer to the way that the exchange is operated, either via quote driven methods or by orders.
Quotes are offered to potential investors at either buy or sell prices, with the buy price usually the lower of the two. The difference between them is referred to as the ‘spread’, which is the capital that the broker will make on the deal.
Order, or auction driven markets, allow buyers or sellers to place orders and a trade will take place once a counterparty is identified. If a trade is listed at market price, then an order will be reached immediately for the best price available at the time.
Listing requirements and regulatory oversight
Each stock exchange has its own listing requirements and these must be reached for a company to be able to publicly list its stock. The requirements differ depending on the exchange but common criteria include operating history, working capital and available shares.
Stock exchanges must be regulated by the FCA to ensure public traders are properly protected. For this reason, companies might benefit from seeking professional corporate law advice before listing themselves on any stock exchange.
Price discovery
Price discovery is the means of markets setting a fair price for the individual stock or asset and to measure whether an asset is overbought or oversold. The process facilitates transparency and there are multiple factors that come into play such as the economy, company intentions, supply, demand and cost of production.
With major stock exchanges around the world and instant online access to a range of markets, cross-border trading is becoming increasingly popular with both traders and companies benefitting from increased exposure and opportunities.
