How the stock exchange works

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More than 15 million have already opened accounts for trading on the stock exchange, but, as statistics show, two-thirds of them are empty. People are attracted by the opportunity to make money on the securities market, but not everyone understands how to do it. Let’s talk about the process of trading on the stock exchange.

What is a stock exchange?

A stock exchange  is an online platform where you can trade securities: stocks, bonds, investment units and more complex instruments, such as options and futures.

The exchange makes sure that all parties fulfill their obligations and transactions pass quickly and reliably. Only papers of trusted companies are allowed to trade – you will not find obvious scammers there. And since there are many sellers and buyers on the exchange, transactions are carried out at a fair market price.

To enter the exchange, you will need a professional intermediary – a broker or trustee. Brokers make trades on your behalf. At the same time, you yourself decide which securities to buy, sell and at what point to do it. The manager makes such decisions without you, but does everything strictly according to the strategy agreed with you in advance. Brokers and managers must have a license from the Bank.

Relations between stock market participants are regulated by federal laws “On the Securities Market” and “On Organized Trading”.

It is possible to buy and sell certain types of securities without going through the stock exchange; this way of trading is called over-the-counter. The organizers of such transactions are most often the same brokers and trustees. But over-the-counter trading is associated with increased risks: the value of securities is often far from the market value. In addition, the exchange does not check the companies that issue them, so it is difficult even for experienced investors to assess the likelihood of profit or loss.

It is even more dangerous to do without the help of licensed intermediaries – there are high risks of stumbling upon outright scammers and losing money.

“My brother somehow got a call from an unfamiliar number and was offered to do stock trading. These, as they introduced themselves, “brokers” promised to study at the academy, the only requirement was to open an account. The conditions are as follows: the money is in a bank in Latvia, you can withdraw it at any time. My brother is a vigilant man, but they  managed to persuade him … ”

In Russia, the main stock exchanges are the Moscow Exchange and the St. Petersburg Exchange. On the Moscow Exchange, you can buy and sell not only securities, but also foreign currency, precious metals, and  derivative financial instruments . The SPB Exchange offers a wider selection of foreign securities than the Moscow Exchange.

Where do securities come from?

They are issued by issuers  – companies, the state or its individual regions – in order to attract funding.

Often, issuers simply want to borrow money from investors at interest, and for this they issue bonds – in fact, IOUs. What are bonds, what income they can bring and what risks are associated with their purchase, read in the text “Bonds: what they are and how to make money on them”.

Companies can also offer investors to become co-owners of their business. Then issuers issue shares , which give buyers the right to a share of the company’s profits (dividends) and, in certain cases, to participate in its management.

Where are securities held?

Today, all stocks and bonds that are traded on stock exchanges are non-documentary – they exist only in the form of digital codes. When an issuer issues securities , the registrar creates a register of shareholders or bondholders of the company on its server and updates it. This register stores information about who owns and how many securities.

Such registries help issuers communicate important news to securities holders (for example, the dates of general meetings of shareholders), accrue dividends on shares and coupons on bonds.

The creators of the company can keep a part of the shares or bonds and continue to keep them with the registrar. But exchange trading is possible only through a system of depositories that record information about all transactions on exchanges. This system includes the central depository of the country, the depositories of exchanges, as well as the depositories of all brokers and trustees.

The Central Securities Depository stores securities of companies that are listed on any exchanges in the world. In Russia, this is the National Settlement Depository (NSD). It also acts as a settlement depository for the Moscow Exchange . In other words, settlements on transactions with all Russian securities that are traded in our country go through NSD.

Depositories of brokers and trustees open accounts at NSD . These depositories keep records of securities for the brokers and managers themselves, as well as their clients. If you are going to buy and sell securities on the stock exchange, you need to open a depo account with one of these depositories. But usually people open an account in the depository of their broker or manager, so as not to pay extra commissions for transferring assets between their account and the intermediary. Your depo account will reflect all the securities that you bought on the stock exchange, but they will be stored in the country’s central depository.

If a Russian company wants to put its securities up for auction, its registrar debits them from the company’s account, credits them to NSD’s account, and a note about this appears in the registrar’s register.

For the first sale of securities on the exchange (this process is called the initial placement), the company hires a broker, and NSD writes the securities to the broker’s depositary account.

When investors buy securities, NSD transfers the securities from the seller’s depositary account to the buyer’s depository account – in the initial placement, the issuer itself acts as the seller. The seller’s depository will write off the assets from the old owner’s depo account, and the buyer’s depository will write them to the new owner’s depo account.

How is trading on the stock exchange

Shares and bonds purchased on the stock exchange can be kept not only in the depositary, but also with the registrar of the company that issued them. To do this, you need to open a personal account with a registrar and transfer securities to it from a depo account with a depository. Then your broker will not be able to access these securities, even if you allow him to use your other assets. And in the event of bankruptcy of a broker , you definitely will not lose those papers that will be kept by the registrar.

This way of storing stocks and bonds is only suitable for securities that you are not going to sell in the near future. When you decide to sell them, you will need to transfer assets again from the registrar’s account to the depository.

In order to conduct transactions with foreign securities, stock exchange depositories open accounts with international settlement depositories. At the same time, when you buy, for example, a share of an American company, in fact it will be stored in the US central depository, but a record will appear in your Russian depository that you are its owner.

Who controls the order in the stock market and stock exchange?

This is done by the regulator  – a state organization that monitors the work of all professional participants in the stock market: brokers and managers, as well as registrars, depositories and exchanges.

In the Russian market, these functions are performed by the Bank of Russia. It issues special licenses to all professional market participants.

Do not trust your money and assets to intermediaries who do not have a license. If your rights are violated by illegal immigrants, the regulator will not be able to protect you. In this case, you will only have to contact the police, the prosecutor’s office and the court.

When you enter into an agreement with a foreign company, the Bank of Russia will not be able to help you in case of problems. To defend your interests, you will have to apply to a foreign regulator and law enforcement agencies of the country where the company is registered.

I want to trade on the stock exchange. Where to begin?

It is important to remember that investments in securities can always result in losses. Therefore, it is worth becoming an investor only if you have free funds and you are ready to risk them.

Buying and selling securities is not a casino or a lottery, but a scrupulous calculation. How not to burn out and choose the safest strategy of behavior on the stock exchange, read the text  “What a novice investor needs to know”.

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