Stock Exchange: Who and how makes money on it

YEREVAN, March 4. /ARKA/. A stock exchange is a trading platform where financial assets such as securities, goods, contracts and services are sold and bought.  Participants make transactions on their own behalf or as someone else's intermediary. 

The stock exchange provides:

- conduct of trades: the exchange sets the rules for all participants; 
- error-free systems;
- safety of transactions: companies offering securities or acting as intermediaries for transactions must be licensed, report and confirm compliance with standards;
- protection of participants' rights: disputes between participants are reviewed and resolved by independent commissions; 
- openness of data: information about securities (quantity, value, number of transactions) is equally available to everyone;
- execution of transactions; the stock exchange is a platform where companies have an opportunity to publicly sell their shares to all interested investors. In addition, the exchange creates conditions for the transfer of ownership rights, as well as the fair determination of quotations, i.e. prices of assets at which they are ready to sell or buy.

According to the type of commodity, exchanges are divided into stock exchanges, commodity exchanges, currency exchanges and cryptocurrency exchanges. Stock exchanges sell and buy securities (stocks and bonds). Commodity exchanges deal with real commodities (precious metals, minerals), futures and options, and currency exchanges deal with currencies. The "youngest" type of exchange is a cryptocurrency exchange, where corresponding assets are traded.

Features of a stock exchange

The main investment instruments of a stock exchange are securities- shares and bonds as well as futures and options (these are contracts that fix the obligations and rights of the parties to buy and sell assets).



Exchange participants

Professional participants of a stock market are companies, which are  obliged to have a license, as well as controlling and registering bodies and  investors who are not subject to the mentioned requirements. The first group includes brokers, regulators and issuers.

Brokers are companies that act as  intermediaries between investors and the stock exchange. They open special accounts for clients and execute transactions on their behalf, receiving a commission for their services.
Issuers are participants that issue securities and place them on the exchange for sale. Issuers are both companies and authorities of cities, regions and governments of states.

Regulators are organizations that issue licenses to professional participants, ensuring that they comply with the requirements and act according to the rules. Regulators protect the rights of investors and create mechanisms to resolve disputes. 

Registrars are professional participants that maintain a database of all security holders. Registrar's clients are joint stock companies.

Depositary is a company that keeps securities and maintains a register. The depositary acts as a guarantor of investors' rights.

Investors are legal entities and individuals who buy securities with the expectation of increasing their capital. Such participants do not have to obtain a license and they make transactions through brokers. There are also qualified investors. Their special status is based on the fact that they have special knowledge, experience and financial capabilities to act independently in the market and invest in riskier assets. Qualified investors are individuals and organizations that meet a number of requirements (education, certificates, certain turnover of transactions, etc.).

Clearing center is a company settling between participants and transferring funds from the buyer of assets to the seller. 



How to become an investor

Technically, the process of investing is not complicated. You need to open a brokerage account, install a special program or application, select an asset and ask your broker to make a transaction. Then the stock exchange registers it, and the settlement authorities transfer funds between the seller and the buyer.

How trading takes place

Making transactions between market participants involves several steps. First, they need to submit a request to buy or sell securities, which is entered into the electronic system. Then both parties’ parameters of the transaction are reconciled. The next stage is clearing, i.e. non-cash settlement between the seller and the buyer and execution of documents. After that, the securities are exchanged for money.

Earlier, deals were made in a special room where many traders and brokers met. Now, "shouting" out terms and reaching agreements in a lively crowd has become very much a part of cinematic reality.

The development of Internet technologies predetermined the rapid growth of electronic trading. Electronic exchanges, where all trading processes are fully computerized, make it possible to increase liquidity and trading volumes many times over, increase the speed of execution of bids (orders) many times over, and reduce transaction costs.

Exchanges conduct transactions through an information network, which includes subscription systems. Brokerage companies provide clients with the opportunity to make transactions via mobile applications, web services and programs. An investor can remotely select assets, monitor price movements and change the composition of the portfolio.



Why you need to know how the stock market works

Knowing how the stock market works, even at a basic level, can change the way you think about how you can manage your finances. Understanding that the stock exchange is a platform with built-in and controlled mechanisms will help you take the first steps in investing. People who are already familiar with the market should also constantly analyze the situation and learn about new laws and instruments. This is necessary for reducing various risks and "customize" investing for oneself : to identify preferred assets, find convenient services, and contact reliable organizations and specialists.

The largest stock exchanges in the world

The largest exchange is the NYSE (New York Stock Exchange). It was founded in 1792. Its capitalization is more than 25 trillion dollars. 

NASDAQ (National Association of Securities Dealers Automated Quotation) is the second largest platform, the world's first electronic stock exchange, founded in 1972. It was NADSAQ that made it possible to trade assets through computerized services.

These two exchanges own more than 40% of the world market capitalization.

The Shanghai Stock Exchange is the largest stock exchange in China and the leader of the Asian market. The platform appeared in 1990. It includes two sectors: one sector trades shares in yuan, the other - in US dollars. Its capitalization is about 7.6 trillion US dollars. 

Euronext is the largest European platform. It emerged in 2000 as a merger of the Paris, Amsterdam and Brussels exchanges. Now Euronext  also includes the exchanges of Portugal, Ireland, Norway and Italy.

What about the stock market in Armenia?

The only stock market in Armenia is the Armenian Securities Exchange, which was established in 1997 as the Union of Securities Market Participants. The first trading session was held on July 6, 2001. 

In June 2022, some 65.03% of the Armenian Securities Exchange (AMX) shares were acquired by the Warsaw Stock Exchange (WFB). 

The Armenian Securities Exchange conducts listing and registration of securities, organizes public trades, stores information about companies. It trades shares, bonds and currencies. At the  end of 2023, its  market capitalization exceeded 384 billion drams.

One of the main directions of AMX’s five-year strategy is  development of investment banking and brokerage activities in order to attract new players to the capital market. The point in question is not only technology, but also proper professional work with people, in connection with which the Exchange initiated the creation of the AMX Academy.



Summary

A stock exchange is a regulated market where securities trading takes place.  The exchange creates conditions for transactions, registers and controls the legality of transactions, and protects participants.
The main assets represented on the stock market are shares, bonds, derivatives (futures and options).
Licensed organizations and investors who need intermediary companies to buy and sell securities interact in the market.   

In order to enter the market, it is necessary to open a brokerage account. Then investors dispose of their assets through the company's services. They can assemble a portfolio and trade securities on their own or additionally hire specialists. 

This material was prepared within the framework of a joint project "The Year of Investing in Oneself " by ARKA, AMI Novosti-Armenia news agencies and Freedom Broker Armenia.

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10:00 03/04/2024