Functions of an Exchange
Overview
This module will introduce you to the systems that process your investments.
You can expect to learn about:
- What a share exchange is
- The purpose of a share exchange
- The benefits of a share exchange
- The main share exchanges
- The Johannesburg Stock Exchange (JSE)
What is a Share Exchange?
A share market is a market of shares - a place where buyers and sellers get together to exchange goods for cash. It is a market like any other market, such as a supermarket (e.g. Checkers or Spar) or a flea market.
A supermarket, for instance, is a place that offers goods from soup to sweets along with numerous other things for shoppers to buy. The share market is a recognized market where people (investors) can freely buy and sell shares issued by companies to other investors.
Therefore, a share exchange is a place where buyers and sellers meet and decide on a price in order to exchange shares.
Certain exchanges are physical locations where you find that transactions are carried out on a trading floor. The other type of exchange is a virtual kind, made up of a network of computers where trades are made electronically (e.g. the JSE).
Purpose of a Share Exchange
Share exchanges clearly play a key role in this share market that you are immersing yourself in. They go beyond being important and are in fact the central force keeping the market together.
Breaking it down into the key elements, here is a look at the two main functions of a stock exchange:
- To help companies raise capital (funds) in the main market.
- To assist with the trading of shares (and other instruments) - in the secondary market.
In other words they help bring a company to the share market and then help to trade its shares afterwards. The exchange helps with the ease of trade and this is why it is talked about as an ‘organized’ market.
The exchange also provides price awareness of all listed shares. In other words as a shareholder you are always able to establish the current value of your share portfolio as you will be able to make certain what each share is currently priced at. In a nutshell, the purpose of a share market is to facilitate the exchange of securities between buyers and sellers, thus reducing the risks of investing.
Benefits of a Share Exchange
Share exchanges operate under strict rules, regulations and guidelines.
As the exchange has very stringent rules, regulations and guidelines for which companies can list, public shares are considered to be much safer compared to the unlisted or private kind.
Furthermore, an exchange has certain legal responsibilities and ensures an orderly market by:
- Distributing information,
- guaranteeing transactions on the exchange,
- facilitating the clearing and settlement of transactions, and
- protecting the interests of the investors.
Main Stock Exchanges
Stock exchanges operate all over the world and you may be familiar with a few of them. When shares are talked about who does not think of Wall Street and the New York Stock Exchange.
It is probably the most recognizable of all the exchanges and is often seen in the media with the ringing of the NYSE bell at the start and end of each day. Other United States exchanges include the NASDAQ and the AMEX.
Then there is the London stock exchange (LSE). Asia has grown significantly in influence on the world stage with the Hong Kong Stock Exchange (HKSE) and the Tokyo Stock Exchange (TSE).
The Johannesburg Stock Exchange (JSE)
The Johannesburg Stock exchange was established in 1887 – over 125 years ago. It was born out of South Africa’s gold rush just one year after gold was discovered in Johannesburg and it was the key to our mining industry as it helped raise the capital required for businesses to flourish.
This prestigious exchange was the cornerstone of business in central Johannesburg for more than 100 years. However, because of growth and technological changes it is now part of the financial hub based in Sandton.
For most of the years in the Johannesburg city centre, shares were traded on the exchange using the open outcry system where all trades are matched, or buyers and sellers' transactions are executed through brokers, face to face, on the trading floor.
Today there is an electronic system that is used for traders to input the prices that they are willing to buy or sell at. The powerful computer system can execute thousands of trades per day.
More than a setting for trading shares and bonds, the JSE stands tall as the engine room of the South African economy. Here, companies from across all industries and commerce gather to raise the public capital that will allow them to expand, in the process creating new jobs, products, services, and opportunities.