How does the stock exchange work

How does the exchange work? Stock market knowledge for entry

Everyone wants to go public. The run on the broker is bigger than ever. So that you can invest your money profitably in stocks, ETFs and Co., you should definitely read a certain basic knowledge. In this guide, we will explain to you, among other things, how an exchange works, how it is regulated and what you need to trade successfully.

What is the stock exchange?

The exchange is a marketplace where assets are traded in an organized and regulated environment. Assets can be securities such as shares, but also raw materials or foreign currencies, so-called foreign exchange. In order for an asset to be traded on the stock exchange, it must be standardized in terms of unit of measure, number or weight and therefore interchangeable. This property is called fungibility.

Supply and demand determine the price or the stock exchange price of the traded asset. The following applies:

  1. The higher the demand, the higher the price.
  2. The higher the offer, the lower the price.

The market price shows you how much, for example, a share has cost in the past.

You already know about the stock market and would rather know what exactly you should look out for as a stock beginner: in? Or are you looking forward to step-by-step instructions on how to buy stocks? You can find the information you need in our guides.

To the guide to stocks for beginners »

Buy shares guide »

Buyers and sellers come together on the stock exchange. Each participant can be both. So you can buy and sell assets at any time. However, you don't do the business yourself. A stockbroker, usually an online broker or bank, does this for you.

The values ​​offered are not physically available on the stock exchange, because today most of the trading takes place electronically. If you buy a share, you will not receive a paper document that you can put in the safe. Instead, it will be credited to your deposit and the purchase price will be debited from your reference account.

Different types of exchanges

The most important type of exchange today is the stock exchange. There is also the foreign exchange exchange, the commodity exchange and the futures exchange. The division is based on the respective commercial object. We will clarify the exact differences for you.

Stock exchange: also securities exchange. Exchange on which securities are traded. In the narrower sense, a stock exchange is a floor or floor exchange. Today, however, most of the trade takes place digitally and electronically.

Currency exchange: Exchange on which foreign currencies are traded. Foreign exchange exchanges determine official middle rates for currencies, which are important indicators of the value of a currency.

Commodity exchange: In contrast to the stock exchange, also a product exchange. Exchange on which movable and durable goods such as coffee, grain, cotton or similar are traded. The goods must be standardized in quantity and quality for trade and thus fungil, i.e. interchangeable.

Futures exchange: also derivatives exchange or options exchange. Exchange on which forward transactions, i.e. futures and options, are traded. Futures and options are high-risk financial instruments and are therefore not particularly suitable for entry into securities trading.

History of the stock exchange: from spices to paper stocks to the digital marketplace

Barter markets and places have been around for as long as people have traded. The first stock exchange was probably named after the Belgian patrician family Van der Beurse. In the 15th century she organized regular business meetings with Italian merchants in Bruges. The first stock exchange building was also erected there in 1409. The stock exchange as we know it today, however, came closer to the Antwerp stock exchange, which originated in the 16th century. Traders from all over the world mainly bought and sold spices there.

At that time there were many different currencies whose exchange rates were not fixed. That left room for fraud and usury. In 1585, merchants met in Frankfurt and set uniform exchange rates - the Frankfurt Stock Exchange was born.

In the 19th century, in the course of industrialization, more and more public limited companies emerged. The first share was traded in Frankfurt in 1820. Since then, the stock market has been developing steadily - despite several economic crises and crashes. A decisive event in the history of the stock market was the introduction of computer trading. He paved the way to the digital future. Today, trading is almost entirely electronic: you buy and sell with a click of the mouse.

This is how the stock market works

Trading on the stock exchange is carried out in three steps. Follow after the trade is complete

  1. Matching = data match between buyer and seller,
  2. Clearing = entry of the trade into the clearing system and
  3. Settlement = fulfillment of the trade.

The stock market basics in the video

Education and financial service provider FinMent explains in the video how the stock exchange works, how trading prices are set, which trading venues there are and what you should pay attention to when trading.

The job of the broker

Brokers are stock brokers. Their task is to mediate between buyers and sellers. In this way, they coordinate supply and demand and set the market price. They are necessary because not everyone on the stock exchange is allowed to act as traders. Usually banks act as brokers. Companies specializing in the stock exchange with the appropriate license can also take on this task.

Stock exchanges and trading hours

There are various stock exchanges around the world and usually also within a country. The largest stock exchange in Germany is located in Frankfurt am Main, but there are also stock exchanges in Stuttgart, Berlin and Munich as well as Börsen AG with the Hamburg-Hanover and Düsseldorf stock exchanges. There are also the five electronic exchanges Xetra, Tradegate Exchange, L&S Exchange, Quotrix and gettex.

All exchanges specialize in certain products. The Frankfurt Stock Exchange, for example, focuses on private investors: inside and derivatives, the Hamburg and Hanover stock exchanges are not only securities, but also insurance and grain exchanges.

The largest stock exchanges in the world (in billion US dollars)

1st place: Nasdaq, US: $ 15,910

2nd place: New York Stock Exchange (NYSE / Wall Street): $ 14,401

3rd place: Cboe Global Markets, US: $ 13,506

13th place: Deutsche Börse AG: $ 1,481

In terms of trading volume in stocks, the world's largest stock exchange is currently the Nasdaq, closely followed by the New York Stock Exchange known as Wall Street. Third place went to Cboe Global Markets in Chicago. In comparison, Deutsche Börse AG has a rather low trading volume.

Source: Statista, October 8, 2020

Each stock exchange has individual trading hours. For example, the Frankfurt Stock Exchange is always open on weekdays from 8 a.m. to 8 p.m., but the London Stock Exchange is only open from 8 a.m. to 4.30 p.m. From a global perspective, however, you will always find a marketplace that has just opened - even if it is in the middle of the night in Germany. The stock exchanges are closed on the weekends.

Costs on the stock exchange

The costs also vary from stock exchange to stock exchange. It is often recommended to trade via Xetra, the fully electronic trading system of the Frankfurt Stock Exchange. Xetra is generally considered to be the cheapest trading venue in Germany and at the same time is characterized by its speed.

If you want to know what costs you can incur in detail, you can find out more in our guide to stock exchange fees.

How to act as cheaply as possible: 5 tips

Especially as a stock market beginner: in you should pay attention to the fees when trading on the stock exchange. After all, they shouldn't eat up your return if possible.

  1. Trade on the trading venue with the lowest transaction fee.
  2. If possible, place your orders on an electronic exchange. This is how you avoid the trading fee.
  3. Trade on an exchange that is located in the euro zone. This is how you avoid foreign currency fees.
  4. Open your account with a broker who does not charge any account management fees.
  5. Make sure that your broker's order fee is as cheap as possible or at least capped. Some brokers even offer order flats.

Our deposit tip: Trade with Smartbroker for € 0

Over-the-counter trading: a worthwhile alternative?

If you want to sell or buy shares after the end of trading, you can switch to over-the-counter trading, including OTC trading (for "over the counter"). In this case, you are not trading on the exchange, but directly with your market maker. That is why we also speak of direct trading.

In OTC trading, the transaction costs are usually significantly lower than on the stock exchange. This is because the actual transaction takes place directly between the trading partners and the market maker only acts as an intermediary. In addition, the trade is usually processed in seconds.

Sounds tempting, doesn't it? However, the risk in over-the-counter direct trading is significantly higher than in exchange trading. This is because, unlike on-exchange trading, OTC trading is not regulated. As a beginner, you run the risk of concluding an unfavorable transaction. So keep your hands off it for now.

The stock market is that safe

The stock exchange is an organized market. All transactions are standardized and regulated. There are various regulatory authorities around the world that ensure compliance with the standards and rules. These authorities also work according to certain standards. In the EU, they are set out in the so-called MiFID directive.

EU-regulated online brokers must also adhere to this directive. They are supervised by the regulatory authority of the country in which their headquarters are located. In Germany, BaFin, the Federal Financial Supervisory Authority, is responsible for regulating German brokers.

For you as an investor: these standardizations and regulations have a big advantage: With an EU-regulated broker, you can be reasonably certain that your invested money will arrive where it should.

There are also standardizations and rules for companies that want to go public. You have to meet strict requirements to be able to issue shares on the stock exchange. For example, the company form and the formation of a supervisory board are prescribed for them. More on this topic in our IPO guide.

This is how you recognize dubious brokers

Unfortunately, there are always dubious brokers. How to avoid becoming a victim of such criminal machinations, you can read in our guide to fraud at online brokers.

Go public in four steps

Anyone can trade on the stock exchange - including you as a newcomer to the stock exchange. All you need is a certain basic knowledge and a deposit with a broker. To make your way to the stock market as easy as possible, you will find step-by-step instructions here.

  1. Reading: Without some basic knowledge about the stock exchange and the products that can be traded there, it can be difficult for you to invest your money wisely. So before you start on the stock exchange, you should read up on the essentials. In addition to the text here, we particularly recommend our advice on stocks for beginners.
  2. Find broker: Then you can go looking for a suitable broker. Almost all brokers now offer good conditions for beginners. Above all, pay attention to free portfolio management, low order costs and the availability of entry-level products such as ETFs and savings plans. In our portfolio comparison you will find an overview of popular brokers that are also suitable for entry.
  3. Open depot: Once you have found a broker, you can open your portfolio there. This can usually be done very easily using an online form that your broker makes available to you on their website. In addition to your personal data, you must indicate how well you know your way around the securities sector. After the subsequent legitimation - in the meantime this is usually very easy to do via Video-Ident - your depot is opened after a few days and you can start trading on the stock exchange.
  4. Buy stocks: A deposit is the prerequisite for being able to buy shares. First, you transfer the amount you want to invest to the associated clearing account. Then you look for your favorite security in the broker's mask, which will be kept in your custody account after your purchase. If you want to know more about how buying stocks works, we recommend our guide to buying stocks.
Saskia has a doctorate in German and has been working in finance since 2017. Her main focus is on securities accounts as well as accident and death benefit insurance.

Latest articles by Dr. Saskia Gall read:

Saskia has a doctorate in German and has been working in finance since 2017. Her main focus is on securities accounts as well as accident and death benefit insurance.

More articles from Dr. Saskia Gall read:

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