What is the Stock Exchange?

What is the Stock Exchange and How Does it Work?

This market provides a platform where investors both individual and institutional buy and sell stocks, bonds, commodities, currencies, and other financial instruments. The main goal of the stock exchange is to facilitate asset trading at transparent and fair prices.
The stock exchange acts as an intermediary that connects buyers and sellers, and by establishing transparency and order, makes asset trading possible. The price of assets in the stock exchange is determined by supply and demand. This transparency allows investors to make more confident decisions. Moreover, by providing accurate and real time price information, the stock exchange helps investors to plan based on real data.
The stock exchange operates in two ways: traditional and electronic. In the traditional method, trades are conducted in a physical location (such as a stock exchange hall), but today, most transactions are conducted electronically through online platforms. This digital transformation has led to increased speed and efficiency in trading.

History of the Stock Exchange in the World

The history of the stock exchange dates back centuries. The earliest examples of organized markets emerged in medieval Europe. One of the first stock markets was established in the city of Bruges, Belgium in the 15th century, and the term "bourse" was derived from a family named "Van der Bourse," in whose residence business meetings were held.
However, the first official stock exchange in the world was established in 1602 in Amsterdam, the Netherlands. This exchange was created for trading shares of the Dutch East India Company and was the first market that allowed ordinary people to buy and sell company shares. This initiative laid the foundation for the modern concept of the stock market and investing.
Subsequently, many stock exchanges were established in different countries, including the London Stock Exchange in 1801 and the New York Stock Exchange (NYSE), which began operations in 1792. The New York Stock Exchange has become one of the largest and most important stock markets in the world and plays a central role in the global economy.

Types of Stock Markets and Exchanges

Stock markets are divided into various categories, each with its own characteristics and applications. Below is an overview of the main types of stock markets:

Stock Exchange

A stock exchange is a market where company shares and bonds are traded. This is the most well known and common type of capital market, aimed at providing financing for companies and investment opportunities for investors.
In the stock exchange, companies attract the capital they need to expand their operations by offering their shares to the public. In return, investors become part owners of these companies by purchasing shares and benefit from their profitability.
Some of the most prominent stock exchanges in the world include the New York Stock Exchange (NYSE), the Nasdaq Stock Market, and the London Stock Exchange (LSE).

Commodity Exchange

A commodity exchange is a market where physical commodities such as metals (gold, silver, copper), agricultural products (wheat, corn, cotton), and energy resources (oil, gas) are traded. In these markets, purchase and sale contracts are standardized, and prices are determined based on supply and demand.
Commodity exchanges enable producers and consumers to better manage prices and avoid severe market fluctuations. These markets play a key role in price transparency and reducing the risks associated with production and trade.

Derivative Markets (Options and Futures Contracts)

Derivative markets are where financial derivative instruments such as futures and options contracts are traded. These tools allow investors to manage their risks or profit based on predicted price changes.
In futures contracts, parties commit to trading an asset in the future at a predetermined price. In options trading, the buyer obtains the right to buy or sell an asset at a specific date, but is not obligated to complete the transaction. These markets are especially attractive to professional traders and corporations.

Foreign Exchange Market (Forex)

The Forex market is the largest financial market in the world, where various currencies are bought and sold. This market allows investors to profit from fluctuations in exchange rates. Forex operates 24 hours a day on a global scale, with daily trading volumes reaching trillions of dollars.
Forex trading involves buying one currency and selling another. This market is particularly appealing to multinational corporations, banks, and professional traders because it enables them to hedge currency risks and profit from exchange rate volatility.

Cryptocurrency Exchange

A cryptocurrency exchange is a market where cryptocurrencies such as Bitcoin, Ethereum, and Litecoin are traded. These markets are relatively new and, due to the decentralized nature of cryptocurrencies, are often not subject to specific regulations.
Cryptocurrency transactions are conducted online via dedicated platforms. These markets attract investors seeking high profit opportunities in emerging and highly volatile markets. With the growing acceptance of cryptocurrencies globally, digital asset exchanges have become one of the most important segments of the financial markets.
As one of the main pillars of the modern economy, the stock market plays a significant role in capital formation, economic transparency, and facilitating transactions. Its long history reflects its importance in shaping financial markets, and the various types of exchanges from securities to digital assets have created diverse opportunities for investors.

Objectives and Key Functions of the Stock Exchange

As one of the main pillars of the economic system, the stock exchange pursues multiple objectives and functions that strengthen the macroeconomy, enhance financial transparency, and attract investors.

Capital Financing for Companies through the Stock Exchange

One of the most important objectives of the stock exchange is to provide capital for companies and organizations. Through initial public offerings (IPOs) or the issuance of bonds on the stock exchange, companies can obtain the capital they need to develop their business, conduct research and development activities, or expand their infrastructure.
In this process, companies offer their shares to the public and receive capital in return. This method has several advantages for companies, including reducing dependence on bank loans and preventing an increase in debt. Furthermore, companies can attract long term and stable financial resources through the stock exchange, which supports their growth and development.
Additionally, listing shares on the stock exchange increases a company's credibility in the market. Companies listed on the exchange, due to financial transparency and compliance with legal requirements, enjoy a stronger position among competitors and investors.

The Role of the Stock Exchange in Financial and Economic Transparency

The stock exchange plays a direct role in enhancing financial and economic transparency. Companies that enter the stock exchange are required to regularly provide accurate and transparent financial reports. These reports include audited financial statements, profitability levels, debt status, and the company’s strategic plans. These requirements enable investors to make informed and transparent decisions.
Moreover, by establishing a regulatory and legal framework for trading, the stock exchange helps prevent financial misconduct. Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States continuously monitor the performance of companies and trading activities. These oversight mechanisms increase public confidence in financial markets and reduce the risk of fraud.

Creating a Platform for Investment and Attracting Investors

Another key function of the stock exchange is to provide a platform for investors to professionally manage their assets. The stock exchange enables investors to participate in the profitability of companies and various industries by purchasing shares, bonds, or other financial instruments.
This market also allows both retail and institutional investors to build diversified investment portfolios based on their risk tolerance. For instance, risk averse investors may invest in bonds or fixed income investment funds, while risk tolerant investors may opt for shares of innovative companies or cryptocurrencies.
The stock exchange also contributes to national economic growth by attracting foreign investors. When foreign investors enter a country’s stock market, they inject new currency and capital into that economy, which can lead to increased gross domestic product (GDP) and job creation.

Introduction to the Main Components of a Stock Exchange

The stock market consists of various components, each playing a specific role in its overall functionality.

What Is a Stock and How Is It Traded?

A stock represents an investor’s ownership in a company. By purchasing a stock, the investor becomes one of the company’s owners and shares in its profits and losses. Stock trading in the exchange is conducted through buying and selling, and prices are determined by market supply and demand.
Investors can purchase stocks either directly (through brokerage firms) or indirectly (via investment funds). Stocks can also be considered liquid assets, meaning they can be quickly sold in the market.

Derivatives (Options and Futures Contracts)

Derivatives are financial instruments whose value is derived from underlying assets such as stocks, commodities, or currencies. These instruments include futures contracts and options.

• Futures Contracts:In a futures contract, two parties agree to trade an asset on a specific future date at a predetermined price. This tool is used to manage risk and hedge against price fluctuations.
• Options:This instrument gives the buyer the right (but not the obligation) to buy or sell an asset at a specific date and price. Options are used either to profit from price fluctuations or for risk management purposes.

Exchange Traded Funds (ETFs)

ETFs are a type of investment fund whose shares are traded on the stock exchange. These funds typically consist of a basket of assets such as stocks, bonds, or commodities and allow investors to indirectly invest in a diversified portfolio by purchasing a single unit of the fund.
ETFs are popular among investors due to their high liquidity, low costs, and transparency in trading.

Cryptocurrencies and Their Role in Stock Markets

Cryptocurrencies like Bitcoin and Ethereum have in recent years become key components of financial markets. These currencies, based on blockchain technology, are traded on cryptocurrency exchanges.
The role of cryptocurrencies in stock markets is continuously growing. Some major global exchanges are now accepting and offering financial instruments related to cryptocurrencies, including Bitcoin based ETFs. Due to their high volatility, cryptocurrencies are particularly attractive to risk tolerant investors.
As one of the most important economic institutions, the stock exchange plays a vital role in economic development by providing capital for companies, enhancing financial transparency, and creating a platform for investment. The various components of the exchange from stocks and derivatives to ETFs and cryptocurrencies offer a wide range of opportunities and instruments for investors, each contributing to the growth and dynamism of financial markets.

Physical Stock Exchange and Electronic Stock Exchange

Review of physical stock exchange and electronic stock exchange:

The Difference Between Traditional (Physical) Exchange and Electronic Exchange

The traditional (physical) stock exchange typically takes place at a specific location such as a trading floor, where brokers and investors gather in person to buy and sell stocks and other assets. An example of this type of exchange is the New York Stock Exchange (NYSE), which has been active since 1792 and traditionally conducted trades with the physical presence of participants on the trading floor.
In contrast, the electronic exchange refers to a platform where transactions are conducted through computer systems and the internet. These systems enable trades to occur without the need for individuals to be physically present in a specific location. Over time, major exchanges like the NYSE have also transitioned toward electronic trading, with more than 80% of trades today being executed electronically on this exchange.
Electronic exchanges offer faster access, lower costs, and higher transparency, eliminating the spatial and temporal limitations of physical exchanges. This has led to more interconnected global markets and has allowed investors from around the world to participate in trading with ease.

Requirements and Conditions for Company Listing on the Stock Exchange

Listing companies on the stock exchange requires compliance with specific criteria and requirements, which vary depending on the particular exchange. Some of the most important general conditions for companies to enter the stock exchange include:

• Regular and Transparent Financial Reporting:Companies must publish their financial information regularly, and their financial reports should be verified by independent auditors.
• Minimum Capital or Share Value:Many exchanges require companies to have a specified minimum capital. This requirement assures investors that the company is financially stable.
• Business Sustainability:Exchanges typically expect companies to demonstrate reliable financial and operational performance over time.

Listing on the stock exchange brings many benefits for companies, including access to public capital, increased reputation, and attracting new investors. However, companies must also accept greater legal and regulatory responsibilities.

Types of Investors in the Stock Market

Stock market investors are divided into two main categories:

• Individual investors
• Institutional investors.

Individual Investors

This group consists of ordinary people who invest in the stock market using their personal financial resources. Individual investors often enter the market aiming to achieve high returns or to preserve the value of their money. Their behavior is usually influenced by emotions, daily news, and short term market fluctuations.

Institutional Investors

This group includes companies, investment funds, and large organizations. These investors typically inject significant financial resources into the market and play an important role in shaping market trends. Unlike individual investors, institutional investors generally adopt a more analytical and long term approach in their trading activities.

Benefits of Companies’ and Investors’ Presence in the Stock Market

An initial public offering (IPO) is an opportunity where companies offer their shares to investors in the stock market for the first time.

• Financing for Growth:An IPO allows companies to raise the necessary capital to develop their business, execute new projects, or reduce debt.
• Increased Credibility and Reputation:Companies that list their shares on the stock exchange experience enhanced reputation and public trust.
• Attracting More Investors:Being listed makes companies more attractive to large and institutional investors, as the credibility of the exchange as a legal and transparent investment platform provides them with confidence.

Enhancing Financial Transparency of Companies

One of the requirements for listing on the stock exchange is the regular and transparent presentation of financial reports. This transparency offers several key advantages:

• Building Investor Trust:Investors prefer to invest in companies that provide clear and reliable financial information.
• Increased Managerial Accountability:Listed companies are accountable to shareholders, which leads to better and more efficient management.
• Reducing Financial Risk:Transparency in reporting enables investors to make more informed decisions and avoid unnecessary risks.

Access to Capital Without Losing Managerial Control

Unlike methods such as taking loans or attracting private investors, offering shares on the stock exchange allows companies to raise capital without giving up managerial control.

• Managerial Control Is Maintained:Shareholders typically intervene only within the scope of their ownership rights, allowing managers to implement their strategies without fundamental changes.
• Greater Flexibility:Companies can easily raise additional funds by issuing new shares and continue their growth.

Presence in the stock market is a golden opportunity for both companies and investors that, by leveraging transparency, liquidity, and access to financial resources, creates greater value.

Risks and Challenges Associated with the Stock Market

Despite its high profit potential, investing in the stock market involves risks:

• Market Risk:Overall market changes caused by external factors such as economic and political conditions can lead to a decline in stock values.
• Industry Risk:Specific conditions within an industry, such as technological changes or intense competition, can reduce the value of related company stocks.
• Financial Risk:The financial condition of the companies invested in can directly affect the value of their stocks.
• Liquidity Risk:In some cases, investors may not be able to sell their shares quickly or at a fair price, especially during financial crises.

Introduction to the Most Famous Stock Exchanges in the World

New York Stock Exchange (NYSE)
The New York Stock Exchange, the oldest and largest stock exchange in the world, is located on Wall Street in New York.

• Features:Due to its stringent listing requirements, it hosts some of the largest and most reputable companies globally.
• Trading:Most transactions are conducted electronically, though the traditional trading floor remains active.
• Global Impact:As a central hub of the world’s financial markets, the NYSE has a significant influence on the global economy.

Nasdaq
Nasdaq is the world’s first electronic stock exchange and is primarily known as the trading venue for technology focused companies.

• Prominent Companies:Major tech giants like Apple, Amazon, and Google are listed on Nasdaq.
• Features:Nasdaq offers high transparency, fast trading speeds, and strong liquidity.
• Target Audience:This exchange is especially attractive to startups and technology driven firms.

London Stock Exchange (LSE)
The London Stock Exchange is one of the oldest exchanges globally, established in the 17th century.

• Features:It hosts international companies from various industries and is recognized as one of the main financial centers in Europe.
• Historical Role:The LSE has played a key role in the development of global financial markets and continues to operate as one of the most important exchanges worldwide.

Tokyo Stock Exchange (TSE)
The Tokyo Stock Exchange is the largest stock exchange in Asia and the third largest in the world.

• Features:It is the trading venue for major Japanese companies such as Toyota and Sony.
• Regional Impact:The TSE plays a vital role in Japan’s economy and the financial markets of Asia.

Shanghai Stock Exchange and Other Asian Exchanges
The Shanghai Stock Exchange is recognized as one of the largest exchanges in China and the world.

• Economic Role:This exchange symbolizes China’s economic development and serves as a center for attracting both domestic and foreign investment.
• Other Asian Exchanges:The Hong Kong and Singapore stock exchanges also play important roles in Asian financial markets, acting as bridges between Western and Eastern markets.

Being listed on prestigious global stock exchanges can create extensive financial opportunities for companies and investors; however, it also requires careful risk management and thorough analysis.

Financial Instruments in the Stock Market

Stocks
Stocks represent ownership in a company and grant the holder voting rights and a share of the profits. There are two main types of stocks:

• Common Stock
• Preferred Stock

Common stockholders share in the company’s profits and losses, while preferred stockholders have priority in receiving dividends.
Bonds
Bonds are a type of debt instrument that allows investors to lend money to companies or governments. In return for the loan, investors receive fixed interest payments and the principal amount on a specified maturity date. Bonds are typically used to finance long term projects or repay debts.
Participation Bonds
Similar to bonds, but usually issued for specific projects such as infrastructure development. In this type of investment, investors share in the profits generated by the project.
Introduction to Exchange Traded Funds (ETFs)
Exchange traded funds (ETFs) are a combination of stocks, bonds, and other assets that are traded on the stock exchange.

• Advantages:This financial instrument has lower costs compared to traditional investment funds and allows for diversification of the investment portfolio.
• Transparency:The price of ETFs fluctuates throughout the trading day, and investors can clearly see the composition of the fund’s assets.
• Applications:ETFs are used for risk management, generating fixed income, or investing in specific market sectors such as technology or energy.

Futures Contracts and Derivative Instruments

• Futures Contracts:Agreements to buy or sell an asset at a specified date and price in the future. These tools are often used for hedging risk or speculation in financial markets.
• Derivative Instruments:These include options contracts, swaps, and other financial products whose value depends on underlying assets (such as stocks, commodities, or currencies). Derivatives allow investors to manage risk or indirectly invest in various markets.

The Stock Exchange in Iran

History of the Stock Exchange in Iran
The idea of establishing a stock exchange in Iran dates back to 1936 (1315 in the Iranian calendar), when a Belgian expert named Van Lutterveld, after assessing Iran’s economic situation, proposed an initial plan to create a stock exchange. However, the outbreak of World War II prevented the implementation of this idea. In 1962 (1341 Iranian calendar), a commission was formed in the Ministry of Commerce, and the preliminary stock exchange plan was signed.
After four years of effort, the law for establishing the stock exchange was passed in 1966 (1345 Iranian calendar), and on February 4, 1968 (15 Bahman 1346), the Tehran Stock Exchange (TSE) officially began operations. The first stock transactions in Iran were conducted on shares of the Industrial Development and Mining Bank.

Introduction to the Tehran Stock Exchange

The Tehran Stock Exchange, as the country’s main capital market, provides an organized and regulated structure for trading securities.
This exchange is divided into two main markets:

• First Market:For companies that meet higher performance standards.
• Second Market:For companies with lower standards that may be promoted to the First Market upon satisfactory performance.

Performance and Indices:
The TEDPIX (Tehran Stock Exchange Total Return Index) and the Equal Weighted Index are the two primary measures for evaluating the market’s status. TEDPIX reflects the overall market return, while the Equal Weighted Index assigns equal impact to all companies regardless of size.
Besides providing capital for companies, the Tehran Stock Exchange offers investors opportunities to diversify their portfolios and protect the value of their investments against inflation.

Challenges and Opportunities of the Stock Exchange in Iran

Challenges:

1. Economic Volatility:Fluctuations in exchange rates, inflation, and macroeconomic policies cause significant market volatility.
2. Information Transparency:Limited access to accurate and up to date financial information can expose investors to unnecessary risks.
3. Political Risk:Sudden changes in domestic policies and international relations greatly affect stock market performance.

Opportunities:

1. raising Small Investments:Iran’s stock exchange helps gather small and dispersed investments to support large economic projects.
2. Expansion of Financial Instruments:The introduction of new financial tools like ETFs and debt securities has increased diversification options for investors.
3. Growth Potential of Domestic Industries:The stock market provides a platform for the growth and development of Iranian companies, which can contribute to the country’s macroeconomic progress.

Despite existing challenges, the Iranian stock exchange remains a key pillar of the national economy and, with improved transparency and enhanced technological infrastructure, can act as an effective tool for economic development.