In this article, we will tell you what the stock exchange is, why it is needed and how it works. You will also learn what types of stock exchanges there are and who can become their participant. This information will be useful to everyone who is interested in the securities market and is looking for profitable ways to invest capital.
Stock exchange: what is it
The stock exchange is a trading platform where financial asset transactions take place. In fact, it is a platform for trading securities (bonds, shares, options, futures). The exchange does not directly buy or sell anything — it is designed for concluding transactions between trading participants.
Functions of stock exchanges
There are 2 main functions of stock exchanges, namely:
- Creation of an open platform for open pricing.
- Reduction of counterparty risk for parties interested in the transaction
To understand exactly how this happens, you need to understand the alternative to the stock exchange — the over-the-counter market.
Indeed, it is possible to carry out transactions in financial assets outside the stock market. That is, by direct transfer of funds to the seller's bank account and transfer of assets from the seller's deposit account to the buyer's deposit account in accordance with the broker/dealer agreement.
In this case, the problem arises with several aspects:
- the parties may be subjects of financial monitoring and identification of each other. Compliance with the principle of "payment against delivery" is not always applicable. After all, when it comes to sums measured in millions of monetary units, it may be uncomfortable for the parties to transfer huge amounts of money, having only a contract as confirmation that the money did not go down the drain.
- conducting OTC operations is not visible to anyone — there is a problem that other market participants do not see the formed prices. This can lead to the fact that some market participants can take advantage of this information asymmetry.
Important: the stock exchange is a platform that acts as a mediator in the buying/selling process, therefore it solves both of these problems
In this case, the single depository institution and the single bank account on which all transactions take place are the accounts of the clearing institution. A clearing institution is an institution that guarantees the fulfillment of obligations, this is its sole task. In Ukraine, the clearing institution is the Settlement Center.
In turn, exchanges have the right to manage accounts based on applications in the exchange terminal or clearing account. At the same time, all transactions carried out on the stock exchange are displayed in the stock exchange report, so other market participants can see what operations were carried out.
Read also: What are bonds and how do they work
Types of stock exchanges
Do not forget that exchanges are a private enterprise and the characteristics of the types of assets that the exchange deals with are limited only by the desire and technical capabilities of the exchange. In Ukraine, the following are traded on stock exchanges:
- shares;
- bonds;
- repo applications with risk control are open to the market.
We have 3 such exchanges in our country:
- Ukrainian Stock Exchange.
- Stock Exchange "Perspektiva".
- PFTS Stock Exchange.
There are also many commodity exchanges in Ukraine, where derivatives (futures, forwards, options) are traded for different commodities, grain, apartments, gas, electricity.
How stock exchanges work
From the above, it becomes clear that work with the stock exchange is full of nuances. Knowing these nuances and simplifying the investor's life is one of the main tasks of a broker. At the same time, the client himself cannot access the exchange. Exchanges are serious about security and, in addition to login/password, protection is provided by special individual keys and a VPN server.
Trading on the stock exchange is a very cumbersome process. Therefore, only professional market participants with a broker's or dealer's license have the right to directly access the exchange and carry out operations on it.
Participants of stock exchanges
The main participants of the exchanges are professional participants of the capital market of Ukraine:
- brokers;
- banks
In turn, these participants conduct transactions on the stock exchange on behalf of their clients. Clients can be:
- private and legal entities;
- residents and non-residents.
Government institutions (we will omit the factor of state banks and enterprises), as a rule, do not participate in the market, or participate in the role of clients of the professional participants described above.
The NBU can also be a participant of the stock exchange as part of the implementation of the state monetary policy, but this is rare. The Ministry of Finance influences the stock market as the issuer of OVGZ, but this happens in Bloomberg and on our stock exchanges it is only visible how banks admitted to the initial placement distribute securities according to client requests.
Read also: How to find and choose a broker: professional tips for an investor
How to start trading on the stock exchange
FC Daliz-Finance LLC has the ability to purchase military bonds on the secondary market, as well as the experience of purchasing military bonds through primary dealers. In the first months of the war, our clients bought military bonds worth more than 500 million hryvnias. Join their number by submitting an application on our website.
As part of our maximum package, we provide the client with the opportunity to see directly what is happening on the exchange with screenshots of the order stack. But within the framework of the usual package, speculative trading does not make much sense due to the low level of liquidity in the market.
Frequently asked questions: stock exchange
How the stock exchange works in simple words
The stock exchange is a platform for organized trading, it acts as a mediator between the buyer and the seller and ensures instant execution of transactions on the principle of "payment against delivery".
Who trades on the stock exchange
Professional participants of the capital market of Ukraine who have connected to a certain exchange have access to the exchange. Basically, these are brokers and banks, which, in turn, act on behalf of clients. Clients of banks and brokers can be both legal entities and individuals, as well as residents and non-residents.
