Stock exchange

The stock exchange is an organised market to bring together supply and demand according to certain rules. It is used to control the timing and location of trading, and it supervises pricing. Cash markets are distinguished from futures ones, just as floor trading is from the fully electronic kind. Shares, bonds, foreign exchange, and commodities can be traded, amongst other things. The goal is reducing transaction costs, increasing market transparency, and establishing market liquidity.

Classification of the stock exchange in the capital market

From a functional point of view, the capital market can be broken down into primary market and secondary markets. The rights and obligations associated with the respective security are securitised for the first time on the primary market. Therefore, it is also referred to as the issue market. The secondary market is responsible for trading that commences after issuing. It represents a highly organised trading venue (stock exchange) with standardised transaction products and processes on which securities will be traded.

The 3 basic tasks of the stock exchange

1.) Allocation

Allocation is the most important task of the stock exchange. This is done by channelling the investors’ capital into best use and feeding the financiers’ investment with the most favourable financing. If the capital flows into an investment that involves a higher risk than another investment with the same return would, it is not utilised in the best manner possible. Allocation thus is best performed if investors always receive the same risk premium for the same risk.

2.) Market

The market function is a prerequisite for performing allocation. This refers to the consolidation and coordination of individual demand and supply requirements at one time and in one place. It does not need to be located in a physical trading centre. Virtual constructs are possible as well. This task of the exchange means that market participants no longer need to conduct individual negotiations. This in turn significantly lowers transaction costs and increases liquidity on the market. Furthermore, the issue of divisibility is solved this way.

A company is not divisible because the assets and liabilities only generate the cash flow reflected in the market value when combined. The stock exchange, however, permits acquisition of a share in the company as a whole. This adds liquidity and diversification opportunities by divisibility, appealing to a larger group of investors. The issue of the amortisation period of an investment is also eliminated, as investors on the stock exchange value the financial instrument on the basis of the future cash flow. An investor may, therefore, recover their invested capital at any time via the stock exchange.

3.) Pricing and evaluation

The plans of economic agents will develop based on particular expectations. If all individuals have the same information available to them at the same time, they will form homogeneous expectations. These are then reflected in the price. Accordingly, the performance of the pricing function depends on the degree of information efficiency. The more efficient this is, the more likely the price of the security will correspond to its fair value.

All in all, the exchange’s services comprise deadline, lot size, risk, and spatial transformation.

What does course formation mean?

The prices of securities are determined by supply and demand. Prices are set by official or independent brokers (market makers) where the highest possible turnover is achieved, i.e., where there is the greatest supply and demand from market participants.

What are market makers?

Market makers are brokers or market participants who ensure continuous trading through buying and selling prices. They are the place where conflicts of interest may arise between the parties if the broker tries to buy cheaply in order to sell more expensively. This may cause in the issuer to widen the bid-ask spread. Nevertheless, it this is not the rule and competitive pressure means that most issuers will try to provide a “real price”.

What is a broker?

A broker is the intermediary between the trader and the stock exchange. They forward buy and sell orders for exchange-traded securities directly to the stock exchanges. Brokers always act as the counterparty for traders who trade CFD, without trading on the exchange directly. Brokers is largely financed by order fees, financing fees, the spread and other processing costs. The number of brokers keeps growing. Is important to learn exactly where to invest one’s money. The cheapest option is not always the best. For example, support must be available in one’s own language and costs must be transparent.

What does the term ECN mean? / What is an ECN broker?

ECN is short for “Electronic Communication Network”. It refers to brokers who specialise in forex trading. ECN brokers never take the opposite position. They provide a marketplace for banks, market markers, and traders, e.g., who can communicate directly with each other. This leads to tight spreads at peak trading times, which is very favourable for active traders.

Is the stock market a perfect market?

In economic theory, the term of “perfect market” is often used to better explain certain particular models. It can be used to explain highly complex relationships. Markets are called perfect if the following conditions are met:

full transparency for all market participants
homogeneous assets
rationally acting and benefit-maximising market participants

This makes it clear that the stock market is not a perfect market either. For example, complete transparency is impossible to achieve since some market participants will always have an information advantage. In addition, information is not available free of charge, causing further differences in information. Beyond this, there will be no completely rational market participants. As a result, no market will be able to come close to this ideal. However, a stock exchange is quite close to this model.

Why is the stock market relevant?

The basic functions of the stock reflect the relevance of this institution. Without the stock market, the economy would be less dynamic. There would be less liquidity on the market and companies would not be able to develop accordingly. Investors would also find it hard to generate returns and the capital would not be put to the most efficient use. Thus, the stock market essentially contributes to society’s prosperity.

Who invented the stock market?

The institution of the stock exchange developed gradually. Initially, traders met to trade goods together. Agricultural products were at the centre of trade efforts. The first futures transactions were made on the commodity exchanges, with a buyer purchasing future harvests from a farmer. The first trading centre of this kind was founded in Bruges in 1409 by a merchant family. At the time, it was recognised that the matter of payment difficulties would arise along with trade. The trade in bills of exchange became increasingly important as a result of this. The first bill exchanges for this type of security were established. Trading in company shares was not a thing yet. This concept would not appear until the 18^th century.

Who controls the stock exchange?

The stock exchange supervisory authority is responsible for monitoring the stock exchange. It issues the stock exchange licence, ensures that stock exchange transactions are conducted properly, and ensures that the legal framework is complied with.

How can one make money on the stock market?

This question is quite easy to answer. It is just like any other profession taken up to earn money. One needs to have a suitable education. There certainly are some cases where someone has gambled on the right security and been lucky. These are rather the exceptions, though. Professional traders do not leave success to chance. They try to generate profits through a reproducible strategy. Their chances of success increase if they have good education in trading.

What are the stock market phases?

The bull and bear have symbolised the ups and downs of the markets for centuries. We do not know for certain where the names developed, but various theories exist. The most common and best known one is that the bull pushes its attackers from the bottom to the top with its horns, thus representing rising prices. The bear’s paw will swipe down from above, symbolising falling prices. The French continue to favour the terms of “hausse” and “baisse”.

What is a baisse?

This means that prices on the stock markets fall over a medium to long-term period. This is also called a “bear market”. Generally speaking, a 20% fall in market prices will be referred to as a baisse or bear market. The opposite of the baisse is the hausse, a rising market trend with a 20% price increase, which is also referred to as a “bull market”.

What does the term of hausse mean?

This means that prices on the stock markets rise over a medium to long-term period. This is also called a “bull market”. Generally speaking, a 20% increase in market prices will be referred to as a hausse or bull market. The opposite of the hausse is the baisse, a dropping market trend with a 20% price reduction, which is also referred to as a “bear market”.

What is a stock market crash?

A stock market crash is defined as an exceptionally sudden fall in prices triggered by mass selling and panic within a short period of time (days to days). This usually occurs at the end of a speculative bubble where the high prices can no longer be explained fundamentally or due to unexpected negative events. The sharp drop in prices will trigger stop after stop, thus accelerating price collapse without generating any strong buying interest. There is no generally applicable definition of the percentage drop in share prices that constitutes a crash.

Trading hours on the stock exchanges

The Frankfurt Stock Exchange and the Xetra electronic trading platform and six other exchanges are active in Germany. They follow different trading hours. Their hours are listed below, along with the most important stock exchanges worldwide:

Stock exchange	Trading hours (Central European Time)
XETRA	09:00 AM – 05:30 PM
Frankfurt	08:00 AM – 08:00 PM
Stuttgart	08:00 AM – 08:00 PM
Hamburg	08:00 AM – 08:00 PM
Hanover	08:00 AM – 08:00 PM
Düsseldorf	08:00 AM – 08:00 PM
Berlin	08:00 AM – 08:00 PM
Munich	08:00 AM – 08:00 PM
Tradegate	08:00 AM – 10:00 PM
London Stock Exchange	09:00 AM – 05:30 PM
NYSE	03:30 PM – 10:00 PM
NASDAQ	03:30 PM – 10:00 PM
SIX Swiss Exchange	09:00 AM – 05:30 PM
Vienna Stock Exchange	08:55 AM – 05:35 PM
Shanghai Stock Exchange	02:30 AM – 08:00 AM
Milan	09:00 AM – 05:40 PM
Madrid	09:00 AM – 05:30 PM

The different stock exchanges

Xetra

The electronic trading system Xetra (Exchange Electronic Trading) is a trading centre of the Frankfurt Stock Exchange and is the successor to its predecessor IBIS, which it replaced back in 1997. Around 90 percent of all share trading on German stock exchanges happens on Xetra. Trading hours are from 9:00 AM to 5:30 PM.

Deutsche Terminbörse (DTB)

The German Futures and Options Exchange (Deutsche Terminbörse; DTB) with its electronic trading systems was founded in 1988 to replace the outdated floor trading and thus simplify trading. DTB thus offered investors and traders greater transparency through guaranteed fulfilment of all transactions without payment or delivery risk, improved liquidity, and settlement via the electronic system. After trading commenced on 26 January 1990 with options only. Futures were traded later as well. The German derivatives exchange GmbH merged with the SOFFEX Swiss derivatives exchange in 1998. The result is now known as Eurex.

Eurex

Eurex (European Exchange) has succeeded the Deutsche Teminbörse (in 1998). Operated by Deutsche Börse AG, Eurex is one of the world’s largest derivatives exchanges for financial derivatives (futures and options). An average of 1.5 billion contracts are traded here every year from over 700 locations around the world, making it one of the most liquid markets in the world.

neue Markt

The “neue Markt” was a stock market segment for growth stocks between 1997 and 2003. It included many young growth companies that experienced an extraordinary boom at the turn of the millennium due to the technology boom. The bursting of the technology bubble and the heavy price losses on the stock markets caused this segment to be closed back in 2003.

NYMEX

The New York Mercantile Exchange (NYMEX) the largest commodity futures exchange for energy and precious metals in North America. NYMEX was founded in 1872. It can be used to trade futures and options on commodities such as oil and gas, as well as metals such as gold and silver.

NYSE

The New York Stock Exchange (NYSE) is the world’s largest and most important stock exchange. It is based on New York’s Wall Street, from which it has also taken its moniker. It opened back in 1792 with five listed securities. Volumes on the NYSE peaked at five to seven billion shares per day during the 2008 financial crisis.

Other interesting facts about the stock exchange

What does XTF mean?

XTF means to a market segment on the Frankfurt Stock Exchange where listed index funds (ETFs) and actively managed funds are traded. Trading takes place via the Xetra electronic trading system.

What is BaFin?

The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht; BaFin) is an institution under public law that aims to ensuring a functioning and stable financial system in Germany. It supervises financial service providers, banks, insurers, and securities trading. It is supervised and monitored by the Federal Ministry of Finance.

The Federal Banking Supervisory Office (Bundesaufsichtsamt für das Kreditwesen; BAKred) merged with the former Federal Supervisory Offices for Securities Trading (Bundesaufsichtsamt für den Wertpapierhandel; BAWe) and Insurance (Bundesaufsichtsamt für das Versicherungswesen; BAV) on 1 May 2002 to form the Federal Financial Supervisory Authority (BaFin).

What is the Triple Witching Day?

Triple Witching Day refers to the third Friday of the trading months of March, June, September, and December. There is increased volatility on the markets then since futures and options on the Dax and EuroStoxx as well as options on individual shares end or are settled on this day. Market participants will try to influence the loss of prices, which results in fundamentally inexplicable movements and is thus compared to witchcraft.

What does the term of issuer mean?

Issuers are institutions that have the task of issuing securities to investors. These can be shares, funds, or bonds, for example. The purpose of issuing the securities is to increase their capital and market capitalisation.

What is the index?

The index is a statistical instrument that represents the changes in certain securities as a key figure. A share index thus is an index to measure and statistically calculate the performance of shares. Such indices are available for commodities and all types of securities worldwide. Price and performance indices are distinguished from each other. For example, the DAX is a classic performance index, while the Dow Jones is a price index.

What is the interbank market?

The interbank market is a worldwide trade between individual banks. Foreign exchange, equities, and fixed-income securities are traded in particular. The banks primarily aim to participate in interest rates with the help of liquid funds that are not required.

What is the cash market?

Transactions on the spot market, also known as the effective market or spot market, take place immediately after the trade, or with a delay or no more than two days. In the futures market, on the other hand, conclusion, and fulfilment are separated in time.

What is post-trading?

Off-exchange trading following the close of trading is known as post-trading. Developments in post-trading can be used to estimate the direction of the next trading day. In general, however, off-exchange trading is less relevant, as the volume is correspondingly low compared to the main trading hours and is less meaningful.

What is the pre-market?

Off-exchange trading before the stock exchange opens is known as pre-trading. The development on the pre-market can be used to estimate the direction of the upcoming trading day. In general, however, off-exchange trading is less relevant, as the volume is correspondingly low compared to the main trading hours and is less meaningful.

What does XTF mean?

XTF means to a market segment on the Frankfurt Stock Exchange where listed index funds (ETFs) and actively managed funds are traded. Trading takes place via the Xetra electronic trading system.

What is a paying agent?

Foreign fund management companies must appoint German paying agents for the sale of its funds in Germany. This is usually a credit institution through which the purchase and sale of fund units is processed.

What are subscribers?

Subscribers are the individual investors in a closed-end fund. For example, someone who wants to participate in a closed-end property fund that aims to invest in a specific building will subscribe to that fund and appear as a subscriber in the documentation. The investor participates in the fund company with the subscription amount chosen by them.