What is a Stock Exchange?

london_stock_exchangeQuestions about what stock exchange is and what features are a part of its notion, of course, is primarily important for the legislation. There is a particular need for a legal definition and differentiation of various trade associations, because the economic importance and the effectiveness of the exchanges are just obvious (it is sufficient to refer to the turnover of the Stock Exchange and compare it with the basic macroeconomic indicators of the economy of the state (e.g., GDP)). It is also apparent that the stock exchange is a subject of managing and leads business activities (stock activities), mediating between buyers and sellers. In this regard, the Exchange has some, but quite specific, rights and responsibilities. The specificity of the rights and obligations is attributable to the same economic isolation and the importance, and consequently to the supervision of the state. Considering all the above, we will try by logical arguing, to define the term ” stock exchange” and point to major differences between the stock exchange and the market.

In practice, the term “exchange” refers primarily to the building, then to the time (Exchange continues from twelve to three), and finally, to a special kind of market. Exclusively with the latter definition, we will deal in the future.

First, one might argue that any stock exchange trade is a trade of replaceable values, and that in exchange hall there are no goods or money. However, markets are not limited to the valuables; there are exchanges, which make their operation in freight (such as the ship-exchange in Ruhrort). In addition, there is also a question related to whether the sale of samples, very often occurring at all stock exchanges, is related to the trade of replaceable values. Secondly, speculation can be described as a characteristic feature of Exchange. However, there is also speculation outside the Exchange. Then we can say that the Exchange is committed to facilitating the trade of goods and securities. This is certainly true, but railroads and many other institutions also serve these purposes, but are not stock exchanges. It is necessary to find other characteristic features of exchanges, distinguishing their traits in comparison with markets.

When people talk about a market, developed before exchange, first and foremost a regular meeting of parties with the purpose of transacting business, happening in a certain place and at certain times, is meant. Place and time – are constant, the parties and operations may vary. Anywhere, where there are no such meetings in a certain place and at a certain time, there can be no question of exchange. The difference between the exchange and the market is mainly in the following three points:

1. In the convertibility of listed on the stock exchange, but absent items

2. The existence of organization in the exchange, in contrast to the free market

3. The existence of formal fixed rates and quotations in the exchange.

Everywhere, where one of these features is missing, it is not an exchange in the stated sense, but rather a market or intermediate levels. Let us analyze in detail the three distinctive traits.


The essence of the Exchange is that it is a special kind of market where trade replaceable values is carried out, while these values and charges for them are not present. What is a replaceable value? This quality is due to the nature of the goods comprising the subject of trade. For example, in the market you buy a particular horse, some flowers, a piece of meat. A hostess buys products of certain quality and class. All these things are there, to examine them in detail. No one buys a pig in a poke. This is followed by the payment and transfer. The characteristic feature of the market is, therefore, in the presence of buyers and sellers, money and goods. At the stock exchange others are often presented, mostly traders. Initially, there were producers and consumers, but they were gradually superseded by merchants. Trading on the stock exchange is not on a physically presented particular product i.e. on the kind of a product, when a bag of rye can be replaced by another of equal quality. Hence the conclusion, that all the goods on the market can be substituted or replaced. The convertibility of goods traded on the exchange leads to one very important consequence: the securities or commodities circulating, i.e., sold or bought on the market may be missing. This fact creates a huge advantage for trade and exchange. The presence of the goods would bring the exchange back into a state of market and the transactions would have been brought up to its size.

Of the convertibility of goods and values, derives the second investigation. Securities or commodities should not be there at the time of purchase, they should not even be available to the owner. These operations form the basis of a stock market speculation. It is based on the fact that each purchase can be compensated with the sale and every sale with a purchase. Or, for example, on the sugar market, the transactions may be concluded for the delivery of sugar supply, when the beets, from which this sugar would be received, were still sown.

The second distinguishing feature of Exchange is the organization. The Exchange is an organized market, i.e. there are bodies for certain functions related to the management, maintenance of order, bringing the exchange transactions to norms, etc. Market does not know such a device. The only body that has the market is the maintenance of order. Sellers and buyers in the market represent a great unorganized mass. But wherever the market rises to the level of exchanges, there appear bodies. However, these bodies are not always the same. Each market has its own organizational structure, but all have at least the stock exchange committee – the chief and the supreme body of the Exchange.

Apart from a clear organizational structure each market also uses the principle of self-regulation, i.e. has inner-Exchange regulations, which are the basis of exchange activity of a specific exchange. These include the Memorandum, Articles of Association and Rules of the trading process.

In the Memorandum are listed the founders of the Exchange, the purpose of its creation and the means of achieving the stated objectives is determined; it is responsible for the obligations of the founders of the Exchange, the initial size of the  statutory fund, its division into shares and how they distributed between the founders, the rights and responsibilities of the founders, the allocation of profits and the establishment of contingency fund, sets out the terms of the termination of the Exchange, indicating the location and details of the Exchange.


As a rule, the Charter of the Exchange includes the following sections:

1. general provisions;

2. creating exchanges;

3. activities of stock exchanges;

4. size, order of formation and change of the authorized capital, funds and profit exchanges;

5. rights and duties of members of the Exchange;

6. management of exchange;

7. accounting and reporting exchanges;

8. termination of the Exchange.

The Rules of the auction reflect the issues such as the participants of exchange trading, and their order, exchange of goods, the order of their setting out and withdrawal from trades; stock transactions, their types, the order of registration, legalization, dissolution, and the recognition of their invalidity; settlement of disputes and sanctions for the violation of the rules of exchange trade.

Stock exchange is an organization with the aim not only to trade in replaceable values, but also the pricing. Pricing on the exchange takes place regularly, and under common control, i.e. behind the authority of the whole assembly or the executive committee. Where there is no such official quotation of prices, there is no exchange.

Now we can define the notion of stock exchange. Stock exchange is an organized market to trade in convertible values on which the process of pricing runs under public control. The objectives of the Exchange are not to supply the economy with raw materials, capital, currency, but the organization, regulation, standardization of commodity, capital and currency markets.

What is a Stock Exchange?
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