Iełda is a private entity that allows the exchange of financial assets such as shares, debts, etc. The stock market is a virtual place, not a physical one. It is an interconnected network of computers with a central computer that stores all current information. For example, New York is called the New York Stock Exchange.
Who participates in the stock exchange?
Investments in the stock market allow companies to raise money to grow their business by issuing shares, which they then sell to savers, making them shareholders in the company. It plays an essential role in the economy. Because it plays such an important role in the state, its proper functioning requires supervision and protection. In the case of Spain, the official supervisory authority is the National Securities Market Commission, which is a public body.
- It is interesting to know the role of each entity participating in this exchange:
- The issuer of shares is a company that issues its securities intended for trading on the stock exchange.
- The regulatory body of the exchange oversees the functioning of the exchange.
- Intermediaries or brokers facilitate trading by offering services and mechanisms to determine what to invest in on the stock market.
- Investors, individuals, or entities buy or sell these shares in order to make a profit.
- Stock indices are benchmark indices formed based on a set of securities listed on a stock exchange.
How does the stock market work?
To start investing in the stock market, you need to choose a broker that will facilitate your trades in the stock market. Exchange negotiations between buyers and sellers are conducted through an intermediary, i.e. a stockbroker or broker, because the intervening parties cannot contact each other without an intermediary. Similarly, a stock seller will use a broker when listing their shares on the stock exchange.
The next step is to define the composition of your portfolio so that each investor buys the selected assets on the exchange. The purchase of shares is registered on an account in the securities depository, the holder of which must manage the capital, buy and sell shares through a broker.
How does the stock market function?
The key to the functioning of the stock exchange is the stock exchange auction. This is when sellers offer to sell shares at a certain price, and buyers offer to buy shares at a certain price. Using the exchange order system, they send information to the market about what they want to buy at what price and on what terms.
Let’s see a simple example so you can adapt it to the stock market and understand how it works. Imagine walking into a greengrocer where anyone can buy and sell products. You ask for tomatoes for 2 euros and the vegetable seller replies that he has no more tomatoes and only 4 euros and 1 kg left.
In this situation, a purchase action would be launched (tomatoes for 2 euros). However, since it does not fit into any situation, it will not be executed. In this case, the buyer decides whether to wait for the price to fall or not. A new buyer comes to the greengrocer and says that he buys a kilo of tomatoes for 3 euros. A vegetable seller fulfills the order because he is happy to sell his product for the price offered by the other buyer.
And finally, imagine that another new vegetable seller comes in and needs to sell the product as soon as possible. And he sees that the first buyer is there, he pays 2 euros per kilo of tomatoes, and then he makes a sale, causing the price of this product to drop from 4 euros to 2 euros. Well, the operation of the stock market is exactly the same as that of this market. However, on a large scale, you only need to add more participants (buyers and sellers) and products (financial assets).