CLASS 1 - The Stock Exchange Explained Simply
The stock exchange is a special place, officially recognized and well-organized, where people buy and sell things called securities. These securities are a bit like pieces of companies (stocks), or loans you give to a company or a government (bonds), or contracts based on these (like options and futures).
Primary Market vs Secondary Market
Imagine a company as a new business that needs money to get started. At the beginning, the company sells its stocks or bonds for the first time to investors — this happens in the primary market.
Only when the company becomes big and stable enough can its stocks be put up for sale on the stock exchange, meaning the secondary market. Here, investors can buy and sell those stocks to each other as many times as they want.
The secondary market is much bigger because there are tons of stocks and securities already out there that get traded every day.
A Bit of History
The stock exchange has been around for a very long time. The first official stock exchange was established in 1719 in Paris. But it really became important and well-known especially after World War II, with the growth of industries and modern economies.
What Is a Market?
In economics, a market is simply the place — physical or virtual — where products are bought and sold. In the case of the stock exchange, the products are securities like stocks and bonds.
How Does the Stock Exchange Work Today?
Since 1994, the stock exchange works entirely through computers. Many computers are connected in a network that automatically matches people who want to buy a stock with those who want to sell it, at the right price, without waiting or negotiating by hand.
Basically, it’s like a big system that quickly and safely brings together buyers and sellers.
How the Stock Exchange Worked Before and How It Works Today
Before, the stock exchange wasn’t digital like it is today. Instead, it happened “by voice” in large trading rooms. This system was called “open outcry”.
Imagine a big room full of people called brokers or traders, shouting out the prices at which they wanted to buy or sell a stock. You would hear many different prices from lots of people until they agreed on a final price. This final price was called the last price, and that’s the price at which the trade was made.
There Isn’t Just One Stock Exchange
When I say “the stock exchange,” I mean the general idea, but actually, there are many different stock exchanges around the world — one or more in each country or economic area. Each exchange contains different financial markets where stocks and other securities are traded.
Every industrialized country has one or more regulated markets — markets with clear rules — where the largest and most important companies are listed.
Who Are These Listed Companies?
In Italy, the biggest companies you can buy shares from on the stock exchange are called Società per Azioni (S.p.A.). In the United States, they have different names, like:
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Corporation (Corp.)
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Incorporation (Inc.)
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Public Company (Co.)
There are also others, like Public Limited Company (Plc.), which are similar to Italian companies called Società in accomandita per azioni (S.a.p.a.).
The Stock Exchange Is a Regulated Market
This means each stock exchange has its own rules, which are enforced by a supervisory authority (for example, in Italy, this is CONSOB). These rules decide which companies can enter and be listed on the exchange.
The requirements to enter the stock exchange depend on the industrial development and the economy of each country. So, not all companies can be listed.
Who Can Be Listed on the Stock Exchange?
Only capital companies — meaning big, structured companies with significant capital — can be listed on the stock exchange.
They must have certain characteristics, such as:
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Large enough economic size.
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Solid technical and organizational structures.
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Economies of scale, meaning the ability to produce or buy large quantities at lower costs, both upstream (with suppliers) and downstream (to customers).
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A good market capitalization (market cap), meaning a sufficiently high market value.
Strict But Necessary Requirements
These requirements can be quite strict and vary from market to market. Sometimes they may seem a bit too tough. But they exist to make sure that the companies listed are strong and competitive — which is very important for the overall health of the market and to protect investors.
Where Can a Company Be Listed?
Today, thanks to globalization, a company can freely choose which stock exchange in the world to list on, even if it’s not located or based in that country. It is no longer forced to list only in its country of origin.
Who is excluded from being listed on the stock exchange
Individual businesses (owned and managed by one person) and simple partnerships (like general partnerships or limited partnerships) cannot be listed on the stock exchange. These types of companies do not have the necessary structure or meet the requirements to enter a regulated market like the stock exchange.
The stock exchange is not a single market, but many markets within it
People often think of the stock exchange as one big market, but in reality, each stock exchange is made up of multiple markets. Each of these markets is internally organized into trading sectors, which group companies and securities according to economic sector or type of activity.
In the past, these sectors were physically divided into “pits”, which were specific areas where traders shouted prices for securities belonging to a particular sector. For example, there was a pit for technology stocks, one for energy, one for pharmaceuticals, and so on.
How sector division works today
Nowadays, with fully electronic trading systems, these physical pits no longer exist. The division into sectors is only a virtual and conceptual classification, because all trading happens on digital platforms without any physical separation.
What determines the size of a stock exchange
The size and importance of a stock exchange mainly depend on:
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The number and size of the listed companies (the more large companies, the bigger the exchange).
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The number of traders and investors participating.
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The variety of financial instruments available for trading (stocks, bonds, derivatives, futures, etc.).
Difference between cash (spot) markets and derivatives/futures markets
It is very important to understand the difference between:
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Cash or spot markets: where contracts are bought and sold “on the spot,” meaning delivery and payment happen almost immediately. For example, stocks, bonds, and indices are traded here.
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Derivatives and futures markets: where contracts are traded “for the future” or at a premium, meaning the contracts don’t directly involve the asset itself but represent a value that depends on an underlying asset. For example, a futures contract might be an agreement to buy a certain product or security at a future date for a price agreed upon today.
What is the Stock Market for?
The stock market plays a key role in a modern economy. It’s like the engine that keeps everything moving forward. It helps both businesses and ordinary people.
Why is it useful for companies?
Through the stock market, companies can raise the money they need to grow, innovate, and expand. This means opening new offices, creating better products, hiring more people, and increasing production.
Much of the technological and industrial progress we’ve seen in the West since the mid-20th century is closely linked to the rise of the stock market. It gave companies a faster, more efficient way to get funding.
Why is it useful for people like us?
It’s not just companies that benefit—investors do too. When you buy shares, you’re not just putting money into a business. You’re actually helping it grow, and if it does well, you earn something in return. You become part of the success.
This means people can take part in the wealth that businesses generate. It’s not just about watching from the outside; you’re involved, and your investment can make a difference.
A more open and democratic financial world
This system also helps make the financial world more democratic. Instead of being controlled by a handful of powerful owners, companies that go public open their doors to everyone. Even small investors can buy shares and become part of the company’s journey.
For example, imagine a pharmaceutical company creating a breakthrough treatment. If you invested in that company, it’s partly thanks to your contribution that the research was possible. And while supporting something meaningful, you’re also making a smart move for your own finances.
The Difference Between a Corporation and an Incorporation
If you're looking into the U.S. stock market, you'll often come across companies labeled as Corp. or Inc. They might look the same, but there's actually a key difference in how these two types of companies are structured and managed.
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A Corporation (Corp.) usually doesn’t draw a sharp line between ownership and management. That means the majority shareholder might also be the CEO or chairman of the board — basically, they own the company and help run it. In this setup, financial responsibilities toward creditors or third parties are shared between the company’s leadership and its owners.
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An Incorporation (Inc.), on the other hand, keeps a clear separation between owners and managers. Here, the board of directors is in charge of all operations and legal responsibilities. Shareholders (even the biggest ones) are just investors — they don’t get involved in day-to-day decisions or financial obligations.
This difference matters because it tells you how involved an investor can be. In a Corp., they might be very active; in an Inc., they’re usually more hands-off.
What Is Traded on the Stock Market?
Think of the stock market as a huge marketplace — but instead of fruits or clothes, it trades financial products. These aren’t physical objects; they’re papers or digital contracts that represent something valuable, like part of a company, a loan, or a raw material.
These financial assets give you certain rights, like earning a portion of the company’s profits, receiving interest payments, or benefiting from price changes in oil or gold.
Who issues these financial products? Usually:
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Large companies that make or sell products and services,
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Commercial enterprises that handle distribution,
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Or public institutions and financial bodies.
Why the Stock Market Is Full of Opportunities
This is what makes the stock market so exciting — you can invest and potentially earn from any kind of business around the world, without actually working in it.
You can become a shareholder in:
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Companies that sell everyday goods like groceries, electricity, or water,
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Giants dealing with oil, gold, or cutting-edge technologies, including those used in the military.
Everything is turned into financial assets you can trade — and with smart choices and timing, you can take part in the global economy and benefit from its growth.
Market Sectors: Cyclical vs. Defensive Stocks
When it comes to investing in the stock market, one of the most important things to understand is what sector a company belongs to. That’s because companies behave differently depending on the economic climate. Institutional investors usually divide stocks into two broad categories:
What does “cyclical” mean?
Cyclical goods are products and services whose demand rises when the economy is doing well and drops during downturns. Think of things like cars, fashion, vacations, and home furnishings. People tend to spend more on these only when they feel financially comfortable.
These goods are considered elastic, meaning their demand is sensitive to economic changes. During a recession, consumers cut back on these kinds of expenses. But in a period of economic expansion, spending on them increases again.
What are non-cyclical or defensive goods?
On the other hand, non-cyclical or defensive goods are essentials that people buy no matter what’s happening in the economy. We’re talking about basics like food, medicine, energy, water, gas, electricity…
These goods are considered inelastic — their demand stays relatively stable because people need them regardless of the economic situation.
Why understanding sectors matters
Knowing the difference between these sectors can make a huge difference in your investing strategy. It allows you to adapt to different economic scenarios more effectively:
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In a strong economy, cyclical sectors often provide bigger growth opportunities.
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In tougher times, defensive sectors help preserve value and reduce risk.
Classification of Market Sectors: Cyclical vs Non-Cyclical
To help you better understand how the stock market is structured, here’s a simple table that divides the main sectors into two big categories:
| Cyclical Consumer Goods | Non-Cyclical Consumer Goods |
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| Raw Materials (Commodities) | Food & Beverage |
| Industrials | Utilities (Water, Gas, Electricity) |
| Telecom and Technology | Pharmaceuticals |
| Durable and Consumer Discretionary Goods | |
This distinction is crucial to understand how different sectors react to the economic cycle:
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Cyclical sectors tend to grow during economic expansions but are more sensitive to recessions.
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Non-cyclical sectors (also known as defensive) stay more stable regardless of the economic climate, making them safer during downturns.
Knowing these differences can give you a real edge as an investor. It allows you to adjust your strategy based on political, social, or economic changes — and, let's be honest, it’s much more satisfying to make money when you understand exactly what you’re doing.
The Privatization of Financial Markets
Another key thing to understand is that today’s stock exchanges are all private.
This means they are no longer run directly by governments but are managed by private companies, often the very institutions that originally created the exchange. These companies handle everything necessary to keep the market running smoothly.
Their responsibilities include:
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Managing and administering the exchange;
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Providing liquidity when needed;
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Appointing key regulatory bodies, such as the Clearing House (which handles contract settlement) and the Exchange Council;
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Hiring floor brokers or market specialists, when relevant;
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And in fully electronic markets, supplying the advanced trading platforms and technology required for smooth, fast operations.
Privatization has made markets more efficient and globally competitive, but it also highlights the need for clear rules and transparent oversight. A strong, reliable market isn’t just fast — it must also be trustworthy.
Official Recognition of Stock Markets and Listing Requirements
For a financial market to be officially recognized and regulated by a securities commission, it must be registered in a dedicated official registry. To achieve this status, the market must meet certain pre-established criteria, including minimum levels of capitalization, liquidity, and number of active participants.
The New York Stock Exchange (NYSE) is currently the largest stock market in the world by market capitalization. Competing with such a financial giant may seem unrealistic, but the transition from traditional trading floors to private electronic systems (known as Electronic Communication Networks, or ECNs) has leveled the playing field. As a result, new and competitive markets have emerged, challenging the dominance of long-standing institutions. The NASDAQ is a clear example of this shift.
Unregulated Markets: OTC and the “Third Market”
In addition to official stock exchanges, there are unregulated or loosely regulated markets, commonly referred to as Over-The-Counter (OTC) markets or the third market. These platforms host the trading of non-standardized financial instruments that are not listed on official exchanges.
OTC markets are private and less transparent, and often come with higher risk. Liquidity can be limited, and there may be greater credit risk, meaning it's harder to ensure that both parties in a transaction will meet their obligations. Despite this, OTC markets may present unique opportunities for experienced and risk-tolerant traders.
How a Company Gets Listed: IPOs and Pre-IPOs
Not every company can be listed on a stock exchange. Only businesses that have achieved a certain level of financial and operational growth can apply for listing. Once a company reaches this stage, it can submit a request to go public, and a regulatory body will evaluate whether it meets the necessary standards.
If approved, the company may proceed with an Initial Public Offering (IPO) — in other words, a Public Offering of Shares. This involves offering a predetermined number of shares at a set price to investors, giving them a chance to become partial owners of the business.
Often, companies choose to first distribute shares privately to a select group of investors, typically venture capitalists. This early stage is known as a Pre-IPO. Another common route is to list shares initially on a junior market (sometimes called the “Borsino”), which acts as a stepping stone to full stock exchange listing.
Other Types of Offerings: OPS and Takeovers
Once a company is publicly listed, it can issue new shares at any time through a process called an Offering of Subscription (OPS). This is done to raise additional capital by selling new shares to the market, usually to fund growth or expansion.
There's also the Public Tender Offer (PTO), more commonly known as a Takeover Bid. In this case, the offer doesn't come from the company, but from an outside investor or organization seeking to acquire a significant share of the company’s equity — typically more than 25%.
There are two types of takeover bids:
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Friendly: when the company’s board of directors supports the acquisition;
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Hostile: when the board is against it, but the offer is still made directly to shareholders.
Capital Structure and Asset Contributions
To create a joint-stock company, two core elements are required:
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A minimum cash contribution, which forms the initial capital;
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An optional contribution of tangible or intangible assets, such as real estate, equipment, or intellectual property.
Asset contributions must be formally evaluated by independent experts, often appointed by the court, to ensure fair value. Once approved, the value of these assets is incorporated into the company’s capital and represented through shares — just like the cash contributions.
All shares, whether issued for money or in exchange for assets, are held in a custodian bank, ensuring proper registration and investor protection.
Difference Between Stock Exchange and Commodity Exchange
When we talk about the term "exchange" in general, we are referring to an organized secondary market where various goods, services, or financial instruments are traded. However, it's essential to distinguish between two main types of exchanges:
Commodity Exchange
A Commodity Exchange is an organized market where physical goods or raw materials—such as grain, metals, cotton, livestock, or wool—are traded. These goods are usually stored in certified warehouses, and what is actually exchanged are warehouse receipts or deposit certificates. These documents certify the ownership of a certain quantity of stored goods.
The holder of a warehouse receipt can either:
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Physically claim the goods, or
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Resell the receipt to another buyer, without having to handle the physical product directly.
Commodity exchanges, in many cases, still operate through the traditional "open outcry" method, where trades are made verbally on the trading floor. This is because, although trades are made on paper, they represent tangible, physical products rather than financial instruments.
Stock Exchange
A Stock Exchange, on the other hand, is an organized market dedicated to the trading of financial instruments, such as:
In this case, no physical goods are traded. Instead, investors buy and sell ownership stakes or financial rights tied to companies. Essentially, investing in a stock exchange means betting on a company’s economic value and future growth.
The Key Difference
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In a Commodity Exchange, profits come from trading real goods, often affected by global demand and commodity prices.
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In a Stock Exchange, profits are tied to the financial performance of companies, with investors trading shares or financial products linked to corporate assets.
Which Is More Liquid?
The Stock Exchange is far more liquid, thanks to its high degree of digitalization, faster transactions, and global participation. In contrast, Commodity Exchanges tend to be slower and less liquid, as they involve physical logistics and seasonal variables tied to the goods being traded.
