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How Does a Stock Exchange Function?

A stock exchange is a marketplace for buyers and sellers of stocks. Here are details of how it works.

A stock exchange is a marketplace, where stocks of several listed companies are traded. Think of a stock exchange like any other market, where buyers and sellers meet, and carry out transactions at a price agreeable to both the parties. It provides a single platform for traders all around the country to execute their trade.

Think of a stock exchange like any other market, where buyers and sellers meet,and carry out transactions at a price agreeable to both the parties.

However, a stock exchange cannot function independently. There are several components that come together when a single trade/transaction is exercised. Here is how it works:

Company

When a company requires capital to expand, it can either approach a financial institution to borrow money or ask the general public to invest in the company. In case of the latter, the company has to approach an investment bank, which will help it get listed on the stock exchange. Shareholders, traders and brokers can trade the company's stock once it is listed on the stock exchange.

Stock exchange

A stock exchange serves as a platform that helps companies raise capital by issuing stocks to retail/institutional investors. Stock that is issued keeps trading handset the exchange even after the company is listed. The price of the stock is determined by the demand, supply and market demographics at a particular time, and keeps changing by the minute.

Buyers/Sellers

When a company is listed on the stock exchange, traders/investors buy and sell stocks with the aim of making money through price fluctuations. These traders/investor scan be individuals, corporate entities, governments, etc.

Brokers

Brokers or brokering houses are middlemen between the buyers/sellers and the stock exchange. They have the authority to carry out a transaction on the behalf of the buyer or seller. It is mandatory for the investor to have a brooking account in order to trade/invest in stocks. Brokers charge an additional fee for the service they provide, which is known as brokerage.

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