Stock exchange explained in 2 minutes


What is the stock exchange and how does it work?

The stock exchange is a global marketplace.

When companies decide to go public they divide the company into shares which are floated on the stock exchange, i.e made available on the stock exchange to buy and sell. 

People who purchase shares of the company become shareholders and own part of the company. Shareholders, unless they own a significant percentage of the company's shares are unlikely to have any direct say on how the company is run but they will be able to attend shareholder meetings where the bosses of the company will present their strategies and plans for the company going forward. These meetings are also a place where the bosses are answerable to the shareholders for bad decisions and poor company performance.

Depending on the perceived value of a company the price of a share will rise or fall. If say Company X has landed a lucrative government contract then confidence in Company X will rise and the company’s share price is likely to rise. 

On the other hand if Company Y suffers a set back during the manufacturing of their product confidence in Company Y is likely to fall and the company’s share price will also fall.

The value of shares fluctuate daily and stock brokers work the market for their client’s, trying to make a profit for them by buying shares when the prices are low and selling shares when the prices are high. 

In relation to the stock market you may have heard acronyms and terms used such as FTSE, NASDAQ, DOW JONES, S & P 500 etc.

These are the names of share indexes and they measure the value of a section of the stock market. For example, in the UK the FTSE 100 is a share index composed of the 100 largest companies listed on the London Stock Exchange. These companies are often dubbed blue chip companies and include companies such as Barclays, Easyjet, Tesco and ITV. The value of this share index is an indicator of how well the UK’s economy is doing as a whole. 

So! that’s the stock exchange in a nutshell, it’s a global marketplace where shares and other company securities such as bonds are bought and sold.

This is obviously a simplified explanation but it should give you a basic understanding of what the stock exchange is and how it works.