Fundamental Analysis

Stock Exchanges — What You Need to Know

Some Basics Every Investor Should Know Before They Start Trading


The saying goes that it is hard to master the game you don’t know all the rules. This is great advice for new investors because the world of trading and exchanges has many rules.

Fortunately, the rules aren’t that complicated once you break them down and add in a bit of history to understand how we got here and from where regarding exchanges. Even better, Olymp Trade provides all the necessary tools and resources to put your new knowledge to use.

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First, let’s get some definitions out of the way.

An exchange is a market place.  Like any marketplace, people come to the exchange to get something in exchange for something else. Of course, exchanges or markets can deal in anything, but we are focused on financial exchanges here.

Financial exchanges exist for buying stock in companies, bonds for lending money to companies and governments, trading different currencies (Forex), exchanging currency for commodities such as oil or gold, and more.

Most of the large exchanges such as New York, London, Hong Kong, etc. deal in a variety of financial assets and not just company stocks, but other exchanges focus on certain types of assets like the Chicago Mercantile Exchange (CME), which deals in commodities, or aptly named Cryptocurrency exchanges.

 

How Financial Exchanges Started in Europe

The first financial exchanges were created in Venice where money lenders would gather to sell and buy the debts of others including government loans. Soon, this practice moved throughout Europe and an official exchange was opened in Belgium way back in the 16th century.

However, stocks and currencies were still not a part of exchanges until the rise of the East India Companies (British, Dutch, and French). These companies started issuing stock to finance their trading endeavors and paid out “dividends” to investors based on the profits off those trade routes to the ends of the Earth.

Even with the issuing of stocks, there still wasn’t an actual stock exchange until 1773 in London and still exists today as the London Stock Exchange (LSE). It was followed about 2 decades later by the New York Stock Exchange (NYSE). Many other exchanges have followed mostly geographically based such as Hong Kong, Tokyo, Canada, etc.

Despite the international competition the NYSE and LSE are still the dominating exchanges. Both have grown in significance over the last 2 centuries, but the NYSE has emerged as the giant amongst men regarding exchanges. The NYSE holds the highest capitalization of the companies listed on the exchange – a total that is more than the LSE, Tokyo, and the NASDAQ combined.

 

… So High Technology Have Come

Today, traders can get information on the price of stocks, currency, commodities, bonds, or indices of these assets in REAL time regardless of where they are in the world. This is all thanks to the existence of the exchanges themselves, which provide this information and allow us to view all stocks directly.

Without this published information, only those people with access to trading floors of New York, London, etc. would be able to see the latest information for making trades. Therefore, the technology that has initiated this connectivity is not only good for the markets, but it enables the everyday average person to access those markets — not just the rich.

Most of the largest companies in the world are listed on an exchange such as Coca-Cola, Microsoft, and BMW. Commodities that we use in our daily lives like oil can be traded in various forms including Brent oil. Not just European and American companies are listed on these exchanges. Many international companies including Saudi stocks can be found there as well.

 

How the Exchanges Work

Without going into too much detail since this topic has many facets and nuances, the best way to think about an exchange is a place to barter or negotiate.

People looking to sell assets enter an offer price in the exchange (ask). They base this price on what they think is going to happen in the market and their own individual circumstances. Their motives are not publicly known nor are they needed.

On the other side is the buyer who enters a price to buy an asset (bid). They base this price on what they think is going to happen in the market and their individual circumstances. Just like the seller above, we don’t know their motives and don’t need to.

The exchange connects the sellers and buyers together based on their “ask” and “bid” prices. If you are a buyer and a seller’s “ask” price matches your “bid” price, then Voila! you have a deal and will automatically be given the asset into your account while the price you paid will be deducted.

 

The Age of Analysis

Over the centuries of exchanges, a number of innovative methods for analyzing the markets have emerged and subsequent variations of those methods have been refined and added to the list.

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The benefit of exchange analysis is that investors can identify patterns of behavior of investors in the exchange over periods of time. These patterns often lead to very predictive outcomes because although people are not robots, they do tend to repeat behavior based on certain types of stimuli.

 

A Secret Behind the Elliott Wave Theory

If we see that when A happens that B is usually the response of the exchanges, then we can invest more comfortably and usually profitably whenever we see the occurrence of A. Of course, the biggest trick of the process is correctly identifying when A is occurring.

One of the first people to successfully and consistently identify these patterns was a man named Ralph Nelson Elliott. In the 1930s, Elliott immersed himself in studying historical trading data that went back through history. He then started breaking down trading charts in current markets and soon thereafter developed the Elliott Wave Theory.

The specifics of the theory and its use require a bit of training and practice, but a simplified explanation is that Elliott discovered that people tend to do the same things over and over and over again regardless of the era and that the psychology of trading is more consistent than the stimuli that triggers the response.

Of course, many different tools have been developed to help traders take advantage of Elliott Waves and other theories of exchange behavior and they are worth looking into as well.

 

Conclusions and Takeaways

Imagine that you had the opportunity to invest in the first East Indies Companies back when they were just beginning and the world was still being explored. Would you have invested or would you just have sat back and watched?

Today’s exchanges are the new opportunities and thanks to exchanges like the Olymp Trade platform, you have access to all the great financial markets and the tools to take advantage of them. Will you just sit back and watch?

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