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Question

How does a Stock Exchange work?

Answer

The stock exchange operates as two different markets:


Firstly, it is a market for issuers who wish to raise equity capital by offering shares for sale to investors in an Initial Public Offering( IPO).  This is sometimes known as a new issue and is basically the point where a company decides to ‘float’ on the stock exchange or where an existing company is looking to raise additional funds by issuing further shares.

It is also a market for investors who can buy and sell shares at any time, without directly affecting the entities in which they are buying the shares (i.e. a secondary market).

As a retail investor, you cannot buy or sell shares directly on a stock exchange such as the London Stock Exchange (LSE), you must place your order with a stock exchange member firm, such as Barclays Stockbrokers, who will then execute the order on your behalf.  You can begin by simply setting up a trading account.

To be listed on a stock exchange, a stock must meet the listing requirements laid down by that exchange in its approval process.  Each exchange has its own particular listing requirements; some are more stringent than others.

It is possible for a stock to be listed on more than one exchange.  This is known as a dual listing.  A dual-listed stock can sometimes provide you with more liquidity; a dual listing on exchanges in different time zones will increase the hours during which you can trade the stock.

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