Stock exchange (also known as stock markets) are special “market places” where already held stocks and bonds are bought and sold. They are, in effect, a financial institution, which provides the facilities and regulations needed to carry out such transactions quickly, conveniently and lawfully.
Stock exchanges developed along with, and are an essential part of the free enterprises system. (No stock exchanges exist in the communist world outside Hong Kong and Macao – which have special status, and Taiwan which is also claimed by China).
The need for this kind of market came about as a result of two major characteristics of joint stock company (Public Limited Company), shares.
1. First of all, these shares are irredeemable, meaning that once it has sold them, the company can never be compelled by the shareholder to take back its shares and give back a cash refund, unless and until the company is winding up and liquidates.
2. The second characteristic is that these shares are, however, very transferable and can be bought and resold by other individuals and organizations, freely, the only requirement being the filling and signing of a document known as a share transfer form by the previous shareholder. The document will then facilitate the updating of the issuing companies shareholders register.
These two characteristics of joint company shares brought about the necessity for an organized and centralized place where organizations and private individuals with money to spare (investors), and satisfy their individual needs. Stock exchanges were the result emerging to provide a continuous auction market for securities, with the laws of supply and demand determining the prices.