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Stock Exchange Market

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Secondary Securities Market (Stock Exchange)

The Stock Exchange is a secondary market where already-issued securities such as shares, bonds, and debentures are bought and sold among investors.

Key Intermediaries in the Stock Exchange

                          ┌───────────────────────────┐
                          │    Stock Market Trading   │
                          └─────────────┬─────────────┘
                                        │
             ┌──────────────────────────┴──────────────────────────┐
             ▼                                                     ▼
┌───────────────────────────┐                         ┌───────────────────────────┐
│          Brokers          │                         │          Jobbers          │
│    (Public Intermediary)  │                         │    (Principal Trader)     │
└────────────┬──────────────┘                         └────────────┬──────────────┘
             │                                                     │
 ├── Acts on behalf of clients                             ├── Trades on their own account
 ├── Provides financial advice                             ├── Acts like a wholesaler
 └── Earns a commission                                    └── Profit from price spreads

1. Stock Brokers

  • Role: Intermediaries who buy and sell shares on behalf of the general public or institutional clients.
  • Function: Advise clients on market conditions, evaluate risk, and execute orders.
  • Compensation: Earn a commission (brokerage fee) for executing trades on behalf of clients.

2. Stock Jobbers

  • Role: Independent dealers who trade securities for their own account (acting similarly to market wholesalers).
  • Function: Trade directly with brokers rather than the public to provide market liquidity.
  • Compensation: Profit from the jobber’s spread (the difference between the buying price and the selling price).

Market Speculators

Speculation is the practice of purchasing or selling financial assets with the expectation that market price changes will yield a profit.

┌─────────────────────────────────────────────────────────────────────────┐
│                             Market Traders                              │
├───────────────────┬───────────────────────────┬─────────────────────────┤
│    Bulls (📈)     │        Bears (📉)         │       Stags (🆕)       │
├───────────────────┼───────────────────────────┼─────────────────────────┤
│ Buy low, expect   │ Sell high, expect prices  │ Apply for new share     │
│ prices to rise    │ to drop to buy back lower │ issues to flip quickly  │
└───────────────────┴───────────────────────────┴─────────────────────────┘
  • Bulls: Optimistic traders who buy securities at low prices, anticipating a price increase so they can sell at a profit.
  • Bears: Pessimistic traders who sell securities at higher prices, anticipating a price drop so they can buy them back cheaper later.
  • Stags: Traders who apply for newly issued shares (IPOs) hoping for an immediate price rise upon listing so they can sell quickly for profit.

Functions of a Stock Exchange

  • Marketplace Liquidity: Provides a central, reliable platform for buying and selling existing securities.
  • Price Determination: Establishes fair market prices for securities through real-time supply and demand.
  • Capital Mobilization: Directs public savings into productive investments in commercial enterprises.
  • Investor Protection: Monitors the financial conduct of listed companies to protect public interest.
  • Information Dissemination: Publishes market data and statistical reports to help investors evaluate corporate health.

Types of Securities Traded

Security TypeDescription
Stocks & SharesEquity units representing proportional ownership in a corporation.
BondsDebt securities issued by governments or corporations to raise long-term capital.
Gilt-Edged SecuritiesHigh-grade, low-risk government bonds that guarantee capital redemption and interest payments.
Bearer SecuritiesUnregistered securities owned simply by whoever holds physical possession of the certificate.
PortfolioA combined collection of investment holdings owned by an individual or institution.

Test Your Knowledge: Stock Exchange Market

Select your answers below and submit to test your understanding.

1. What is the primary function of a Stock Broker?

2. Which speculator expects share prices to RISE in the future?

3. What are Gilt-Edged Securities?

4. A trader who specializes in applying for NEW share issues (IPOs) to flip them quickly is a:

5. What term refers to a collection of various investments held by one individual or institution?

Test Your Knowledge

Click below to generate a short, interactive 5-question quiz based on this lesson.

Stock Exchange Market - PreviousBusiness UnitsNext - Stock Exchange MarketInsurance

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