market architecture of selected stock exchanges in ... - Gilles Daniel

62 Preliminary Considerations2.1 The Stock Exchange in GeneralEvery stock exchange is a system where shares and other securities, issued bycompanies and listed by the exchange are traded. Though, probably the most obviousway to classify financial markets corresponds to the type of securities traded in thoseexchanges. Traditional exchanges are subdivided into currency, stock, andcommodity exchanges depending on the assets traded on them. The modern form ofcommodity exchange is the futures exchange.A stock exchange has two main functions: raising capital and trading. Raising capitaltakes place in the primary market. On the primary market shares of newly listedcompanies are issued by means of initial public offerings. Furthermore, there arerights issues by existing companies quoted on the exchange. These issues arepurchased directly from the issuer and since they are new they also affect the size ofthe equity pool. The secondary market is where these securities are actually traded ina regulated environment. The market participants determine the prices of thesecurities through supply and demand whereas in the primary market the initial priceis set (JSE 2004). The third market comprises the over-the-counter trading of listedsecurities among non-exchange members, e.g. institutional investors andbroker/dealers. The fourth market involves direct trading of securities betweeninstitutional investors through a computer network rather through an exchange inorder to avoid transaction costs (Reilly 1986).