‘Stock exchange’, as used in general conversation, has taken on the meaning of both the business that takes place in the investment markets and the physical place where most transactions take place. We can speak in general terms of the market being up or down and we are referring to the general performance of many individual stock exchanges in the country, such as the NYSE or the Nasdaq in the United States. To use more specific language about where shares are traded, the term ‘Stock Exchange’ is used.
Typically, each company will trade its shares on an exchange, unless the company is very large and, for example, trades in multiple countries. Each country may have several Exchanges where different companies are listed. As long as the hours of operation are respected, people from all over the world can trade on the Exchanges of any country. Trading times are similar to, but slightly shorter than, a normal business day. Exchanges in New York are open from 9:30 a.m. to 4:00 p.m. Eastern Time, and other exchanges have similar trading hours in their local time zones. Japan, India, England, Germany, Switzerland, China, and the United States are home to the world’s major stock exchanges. These big players include the Tokyo Stock Exchange, the Shanghai Stock Exchange, the Nasdaq, the New York Stock Exchange, the AMEX, the London Stock Exchange, the Frankfurt Stock Exchange and the Mumbai Securities.
Stock markets can be used as a barometer of a country’s economic health. When output is high, unemployment is low, and inflation is low, the market gains in total value. This increase is a bull market. When stock prices start to fall in a bear market, the economy is usually in a recession. High inflation and high unemployment are usually seen at this time.
Changes in stock prices are not entirely dictated by the health of the economy. A large part has to do with investor psychology and how it relates to changes in supply and demand. When a stock becomes a hot commodity, other investors try to join in and the price goes higher and higher. Conversely, if several people start selling a stock and the price drops, others will try to sell before it drops any further. However, this drive to sell only drives the price down faster. These psychologically driven market swings tend to be short-lived and balance out over the long term. It is economic health over time that is reflected in long-term market trends.
However, stocks are not the only place to invest. Other important investment markets include the foreign exchange, futures, and options markets. Globally, the largest single segment of the investment sector is in foreign currency exchange. Forex traders move very large sums of money between different currencies very quickly to take advantage of small fluctuations in the exchange rate. These trades are usually only held for one day and are only profitable if the trader is very attentive to the factors that influence the rates on the day.
Futures markets are designed to offer buyers and sellers in volatile markets fixed prices at set times. The price of a quantity of goods is fixed in the contract, as is the time of delivery. When the market fluctuates, the fixed price of the contracted good means that the value of the contract itself changes. Futures traders are less interested in the price realized in the contract for the goods, but are interested in the value of having that fixed price against the actual changing price of the goods.
The Options Market also deals in futures price contracts. The difference with the futures market is that options allow the owner to buy at a specific price before the indicated date, but they do not obligate the owner to buy that item. The Options themselves can be bought and sold, or used in a higher risk investment such as insurance. These investment tools have a high risk of loss. It requires specialized knowledge of the option itself, as well as the market in which it is traded in order to make a profit. Most traders also benefit from having experience in a market. Stocks require less specialized knowledge to invest with relative safety because the market as a whole changes more gradually than the options market. Stock traders may invest in certain ways with the intention of changing the value of shares very quickly, but most investors put their long-term investments in stocks.