The stock exchange works simply as a globe spanning market place for financial products. Money is given in exchange for company stocks instead of fruit and vegetables in a physical market.
There is no single easy answer to the question; ‘how does the stock exchange work’? Mostly it depends on the viewpoint of the questioner. There are four major stakeholder groups in the stock market; the companies that issue the stocks, the buyers and investors who take ownership of the stocks, the brokers who are the market traders working in the exchange, and the stock exchange company that owns and operate the actual marketplace and electronic support systems.
The stock exchange works for the companies quoted on it as a source of cash. They offer stocks or certificates of ownership in their company in order to raise money for capital investment such as building a new factory or buying a fleet of trucks. Once the stocks are issued and sold they become commodities in their own right and may be traded many times in exchange for money that passes from the buyers to the sellers and only affecting the companies named on the stock certificates when it comes to communication and annual dividend payout. The people who are holding the stocks each year when the company announces it’s statement of accounts are paid a lump sum of earnings per share.
The stock exchange works for the buyers and investors in stock also as a source of cash. They earn returns on their investment cash through dividend payouts and the appreciating value of their stockholdings as long as the named companies are doing good business and in demand from investors. The number of stocks for each company quoted on the stock exchange is finite. What happens to the price of a stock when the supply is fixed and the demand increases? The price goes up.
The stock exchange works for the brokers as guessed what? Yes you guessed it, a source of cash. They earn money from their clients with fees when they acquire or sell stocks on their behalf. They also charge fees for consulting and advising their clients on the best buys or profit making opportunities. They also store the actual stock certificates mostly electronically these days but also physically.
The stock exchange works for the stock exchange company that owns and operates the actual marketplace and electronic support systems as a source of cash. No surprise there then. The New York Stock Exchange NYSE for example is owned by a company called ‘Euronext’ and as accompany they are quoted on the stock exchange too.