A stock exchange is a market where the supply and demand for securities is concentrated. Famous global examples include the New York Stock Exchange, the Frankfurt Stock Exchange, the London Stock Exchange, or, in Switzerland, SIX Swiss Exchange. These stock exchanges have become so well known because of their major economic importance. Using SIX Swiss Exchange as an example, our article explains exactly what functions a stock exchange performs.
Explaining the stock exchange, using SIX Swiss Exchange as an example
What is a stock exchange and what exactly does it do? A lot of people have heard of the stock exchange and know that it has something to do with money, banks and the economy, but many aren’t sure what actually happens on the Swiss stock exchange every day. We’ll explain more in this article.
The stock exchange as a market place for buyers and sellers
A stock exchange is a facility that brings together buyers and sellers of securities. These are instruments with a uniform structure and denomination that are suitable for large-scale trading. Shares, bonds, fund units and derivatives are examples of securities. If the stock exchange did not exist, buyers and sellers would have to negotiate with each other, which would require a great deal of outlay for research and information. Moreover, SIX coordinates interests between bodies that demand a large amount of capital in the long term – generally companies or the State – and investors offering low sums in the relatively short term. This enables private and institutional investors to buy and sell securities on the stock exchange at any time without having a direct impact on the company concerned. In such instances, the stock exchange is known as a secondary market. Secondary means that it is no longer the companies themselves that are looking for money but investors who trade in securities such as bonds or shares, similar to a second-hand purchase. Banks or brokers usually act as intermediaries for such trades.
The stock exchange as a platform for new issues
SIX also acts as a primary market for new securities which are being sold for the very first time. When a company publicly trades some of its own shares on the stock exchange for the first time, this is known as a stock market flotation or an initial public offering (IPO). During this process, is also the job of SIX Swiss Exchange to examine all the relevant documentation and decide whether or not to approve the issuer. The term “issuer” refers to whoever is issuing securities – so it might be a company or the State.
The stock exchange as a price setter
The biggest Swiss stock exchange, SIX, regulates the proper price-setting process, i.e. the price of the security being traded. It is vital to this process that supply and demand are concentrated in a single location, leading to competitive prices and rates. As a rule of thumb: the livelier the trading is, the more liquid the market is, and the sooner a buyer will find the right seller.
The stock exchange as an index issuer
There are all sorts of different indices: a stock market index, for instance, indicates price performance for a selected category of shares, and is therefore important for share trading. Such a category of shares may be shares of the companies with the strongest turnover or market capitalization in a specific country or region. The Swiss Market Index (SMI) tracks the prices of 20 selected Swiss company shares, and is seen as the barometer of the Swiss stock market. You can find more detailed explanations about the SMI in our article “How is the SMI made up?”.
Counterparts to the SMI include the American Dow Jones and the German DAX. Find out more about indices and the various types of index in the article “Put it simply please! Index”.
The stock exchange as a monitoring body
Regulating and monitoring stock market trading is one of the vital roles played by the stock exchange. By setting rules and monitoring trade on an ongoing basis, the stock exchange ensures everything runs in accordance with statutory and regulatory provisions. One thing it does is schedule trading days in its trading calendar, which it then publishes in an appropriate manner. It also makes sure that trading complies with the price-time priority principle. Additionally, the stock exchange is responsible for setting out instructions that are automatically applicable following a transaction, including the estimated settlement date and settlement amount.
As we can see, the stock exchange is responsible for a wide range of functions in relation to the market. It is not only a trading platform for those buying and selling securities, it is also there to ensure trading between investors and companies runs smoothly. This means it is crucial to the overall economy of a country.
Find out more about the origins and history of stock exchanges in the article ”How does the stock exchange actually work?”.