The stock exchange is the market that connects investors who buy and sell investment instruments such as stocks. Stocks are shares of ownership in publicly traded companies. What is the stock exchange?
The term stock exchange refers to a key stock market index, which is the General Index. Since it's challenging to monitor every stock, these indexes include some representative stocks, and their weighted performance term provides a general picture of how stocks generally move in a stock market.
In financial news publications, it is often reported that the stock exchange moved downward or closed with an increase. This means that the stock market indices moved either upward or downward, meaning the stocks included in each index collectively lost or gained value.
Investors who buy and sell stocks aim to profit from the fluctuations in stock prices and also from the dividends distributed by companies. The type of stock exchange we are referring to deals with securities. Additionally, there are other types of exchanges, such as derivatives exchanges, where the buying and selling of futures and options contracts take place.
How does the stock exchange work?
The operation of the stock exchange for the purchase of stocks is simple. In practice, it functions as an auction house where buyers and sellers negotiate prices to exchange stocks at mutually agreed-upon prices. In the modern era, this process is carried out by computerized systems.
In Greece, there is the Athens Stock Exchange, where publicly traded companies introduce a portion of their stocks through a specific procedure. Supply and demand determine the price of each stock being traded, or in other words, the level at which investors, traders, want to buy or sell.
Potential buyers make an offer for a stock, which is the highest price they are willing to pay, referred to as the "bid," and it is usually lower than the offer made by sellers, which is known as the "ask." The difference between these two is called the bid-ask spread. To achieve clearance and exchange, a common price must be found for which the two contracting parties, the buyer needing to increase the bid, and the seller needing to reduce the ask, come to an agreement.
This process is automated through electronic systems that record the bid and ask in the order book, where orders for the ask represent the supply and for the bid represent the demand.
Each transaction involves a specific stock, and its price is influenced by the financial situation of the company, profits, investments, etc. However, in general, the prices of a subset of stocks in the stock exchange can be affected by news, economic events, or financial statements related to the sectors of the economy they operate in.
An additional concept is short-selling, where investors borrow stocks to sell them but are then obligated to buy them back and return them. This technique is used by investors to profit from a decline in a stock's price. To borrow, they typically turn to a specialized department of a stock exchange called the stock loan department.
Fundamental vs. Technical Analysis
Analysis of stock exchange securities can be carried out using two methods of analysis.
Fundamental Analysis: This is the analysis of companies where their value is determined using data derived from financial statements such as the balance sheet, statement of cash flows to determine free cash flow, income statement, and statement of changes in equity.
Technical Analysis: This method involves evaluating the financial situation through a series of statistical techniques and chart analysis derived from historical price data.
Introduction of a Company to the Stock Exchange
The requirements for listing a company in Athens Stock Exchange are:
- Equity capital exceeding €3,000,000.
- Three consecutive annual financial statements with an auditor's signature.
- EBITDA of the three-year period amounting to €6,000,000.
- Sufficient stock dispersion.
- Tax audits of published annual financial statements (preparation of balance sheet, income statement, and other documents relevant to large entities).
- Indirect holding of shares.
If a company cannot meet these criteria, it can participate in a multilateral trading facility according to Law 4514/2018, which is an alternative market.
Stock Market and Taxation
The purchase of stocks on the stock exchange is not subject to taxation but serves as a proof of ownership. Taxation arises when stocks are sold, and capital gains are reported in the tax return. This is considered as capital gains, and it is taxed at a rate of 15% on the profit earned.