What is the Stock Exchange?

When we have savings to invest, one option is to buy shares, bonds or other financial instruments, and possibly sell them later. The stock exchange allows us to do all this in a convenient and secure way.

An organized financial marketplace

The stock exchange is an organized financial market, a place where financial instruments can be bought and sold according to clear rules, through authorized intermediaries, and under the supervision of a public authority that ensures transparency and fairness. The main instruments traded on the stock exchange include shares, bonds (including government securities), derivatives, and exchange-traded funds (ETFs).

In practice, when we buy or sell on the stock exchange, we're placing an order with an authorized intermediary, such as a bank, that operates on the market.

Today, all trading is done electronically via digital platforms that match buy and sell orders in real time. In the past, trades were carried out in the physical building of the stock exchange, where brokers would shout out their offers in a space known as the 'trading pit'.

Italy now has a single stock exchange: Borsa Italiana, also known as the Milan Stock Exchange or Piazza Affari, named after the square where it is located. Other countries, like the United States, have several. The New York Stock Exchange (NYSE) is the largest in the world by market capitalization. It is often referred to as Wall Street, after the street where it's based (named for the wall that once stood there during colonial times!).

What is it for?

Helping businesses and institutions raise funds

By listing shares or bonds, companies, governments and other entities can raise capital from the public more easily and transparently, supporting growth or ongoing operations.

Providing transparent pricing

The stock exchange brings together information and trades, helping to establish public, up-to-date prices that reflect market conditions.

Offering liquidity

Anyone holding a listed financial instrument can sell it quickly without needing to find a private buyer, thanks to the constant presence of buyers and sellers.

Building trust

Listed companies and institutions must regularly and transparently inform the market. Regulatory authorities monitor compliance and ensure fair trading.

Who's Involved?

Five key players operate within the stock exchange:

• The market operator manages and oversees the exchange, sets its rules, and ensures they're followed. In Italy, this is Borsa Italiana S.p.A., which runs the main regulated markets (e.g. the Electronic Share Market - MTA, and the Electronic Bond and Government Securities Market - MOT).
• Issuers - companies, governments and public bodies - create and offer financial instruments like shares or bonds to raise capital. These instruments can then be listed and traded on the stock exchange.
• Investors buy and sell financial instruments through authorized intermediaries (such as banks or investment firms). They may be individuals investing their savings (retail investors) or professional operators like banks, insurance companies and asset managers (institutional investors).
• Intermediaries carry out buy and sell orders on behalf of investors (as brokers) or for their own account (as dealers). They must be authorized by regulatory authorities. Banks and investment firms (SIMs) typically perform this role.
• The supervisory authority oversees the functioning of the exchange and financial markets to ensure transparency, fairness and investor protection. In Italy, this is Consob, the independent authority that supervises financial markets.

The financial system includes two types of markets:

• Primary market: Investors buy newly issued financial instruments directly from issuers. This can happen via the stock exchange, for example through an Initial Public Offering (IPO) or a capital increase by a listed company.
• Secondary market: Investors buy and sell existing instruments among themselves - this is the daily activity on the stock exchange.

Prices and Indices

Prices (or 'quotes') of financial instruments on the stock exchange change constantly based on investor information and expectations - for example, about a company's future profits or a bond issuer's ability to repay debt. Positive news tends to push prices up; negative news brings them down.

Market indices are built by aggregating the prices of listed instruments. A stock index is a number that reflects the price movement of a group (or 'basket') of shares from a specific sector or region. The index's change shows how the prices of its component shares are moving. Italy's main stock index is the FTSE MIB. When we say 'the market is up' or 'down', we're usually referring to these indices.

Rules and Oversight

The stock exchange operates under its own set of rules and is supervised by a public authority - making it a regulated market. This ensures that investors can trade efficiently and safely, with prices that fairly reflect available information, in a transparent environment based on accurate, complete and publicly available data about financial instruments, their issuers, and market prices.

The Rules Set Out, Among Other Things:

• which issuers and intermediaries may be admitted, and in which cases they must be suspended or excluded;
• which financial instruments may be listed, and when their trading (buying and selling) must be suspended;
• what information issuers and intermediaries must provide to investors;
• how prices must be verified, published and made available.

The market operator defines the stock exchange's rulebook and ensures that issuers, intermediaries and investors comply with it. The supervisory authority sets additional requirements and oversees both the operator's activities and the fairness and transparency of trading.