How are shares traded?

Most major shares are traded on the stock market. This is a general term for a global network of specific exchanges where shares are bought and sold.

For example, the majority of UK shares are traded on the London Stock Exchange (LSE), while most US shares can be found on the New York Stock Exchange (NYSE) or NASDAQ.

These exchanges are highly-regulated marketplaces where buyers and sellers come together to negotiate the transaction of shares. Only certain qualified individuals are allowed to trade physically on the exchange itself, so investors generally need a stockbroker to act as a middleman.

What is a stockbroker?

The role of the stockbroker is to buy and sell stocks on their clients' behalf. Traditionally, an individual investor would need to call up their broker, who would then relay the trading instructions to a qualified dealer on the exchange. Nowadays, however, this process is almost always conducted online.

There are three main types of broker:

1.Full-service

Create and execute a strategy based on the investment goals of the client - trading on their behalf.

High commission

2. Advisory

Provide investment advice and recommend specific trades, but leave the final decision to the client.

Medium commission

3. Execution-only

Simply carry out the client's trading instructions, usually via an online platform. No advice given.

Low commission

When choosing a broker it's important to consider your knowledge of the markets as well as the amount of time you're prepared to commit to watching your portfolio.

Trading times

Shares are only traded during the opening hours of their designated stock exchange. Here are the opening and closing times of a few major exchanges (UK time, April - October. Opening times will be different throughout the rest of the year due to local daylight saving time changes):

Stock markets

How do shares become listed on an exchange?

Companies are either privately owned or public.

A private company isn't listed on a major stock exchange, so you would usually have to contact the owners directly to buy shares. Even then, they are under no obligation to sell them.

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However, if the owners want to 'go public' to raise some capital or boost the company's reputation, they must carry out an initial public offering, or IPO. Following an IPO, the company's shares are listed on a stock exchange and ordinary investors can buy and sell them.

Publically-listed companies often have many more shareholders than private ones, and are subject to much tighter regulations. The exact rules tend to differ depending on the exchange, but generally a public business needs to appoint a board of directors and disclose detailed financial information at least twice a year.

A key advantage to investing in shares is the potential for dividends.

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A dividend is an amount of money paid to shareholders, representing a portion of the company's profits.

When a company makes a profit, the management get to decide how much to put back into the business and how much to pay to the shareholders as a dividend.

Dividends can compensate for a share price that isn't moving much, giving shareholders an income instead. Companies that are expanding rapidly usually don't offer dividends, choosing instead to reinvest all their profits to sustain growth. The reward for shareholders in this case is a higher expected share price in the long run.

What are stock indices?

You may have already heard of stock indices such as the FTSE 100, the Dow Jones or the Nikkei 225. Numbers often quoted on the news, or in the business section of the newspaper, usually alongside a value saying how much they've moved up or down.

But what are they? And what do they represent?

A stock index is a measurement of value of a certain section of the stock market.

This 'certain section of the stock market' can be:

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1. An exchange (like the Tokyo Stock Exchange or NASDAQ)
2. A region (such as Europe or Asia)
3. Or a sector (energy, electronics, property, etc)

The FTSE 100 for example, is a number representing the largest 100 companies traded on the London Stock Exchange.

FTSE 100

If, on average, the share price of these companies goes up, then the FTSE 100 will rise with them. And if the share prices fall, it will drop.

Why are they important?

Stock indices give traders and investors an indication of how an exchange, region or sector is performing.

The ASX 200 for example, tracks the performance of 200 of the largest companies in Australia. If the ASX 200 starts to rise, then on average these companies are performing well. A rising ASX 200 tells investors that, generally, the state of the Australian stock market is improving.

ASX 200

And if the Australian stock market is on the up, then more often than not, the entire Aussie economy tends to be doing well. So, movements in the price of major stock indices can often give traders an indication as to the health of an entire country.

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That's important information when planning your next trade.

What are the major stock indices?

Most nations have one major stock index that represents the largest companies in that country. For example:

FTSE 100              UK

DAX        Germany

CAC 40  France

IBEX 35 Spain

FTSE MIB             Italy

Nikkei 225           Japan

Hang Seng           Hong Kong

ASX 200               Australia

TSX 60   Canada

However, in the US there are several major indices, all based on slightly different sections of the market. The three main US indices are:

Dow Jones Industrial Average (DJIA)

DJIA

One of the oldest and most quoted indices, the Dow Jones Industrial Average represents 30 of the most influential companies in the US. It was first calculated in 1896 and historically was made up of firms involved in heavy industry. Nowadays this association has been all but lost.

S&P 500

SP 500

More diverse than DJIA, the S&P 500 is based on the value of 500 of the largest US shares listed on either the New York Stock Exchange (NYSE) or NASDAQ. It was first used in its current form in the 1950s and today represents around 70% of the total value the US stock market.

NASDAQ-100

Nasdaq

Established in 1985, the NASDAQ 100 is based on 100 of the largest non-financial companies listed on the NASDAQ exchange in New York City. It represents firms across a number of sectors, but in particular computing, telecommunications and biotechnology.