How do stock exchanges work?

The stock exchange works on the "supply and demand" principle. If something is very popular, like oil, then that item will be more valuable. If something is very unpopular, like old cheese, than that item becomes less valuable. Good investors try to figure out what will become more popular and more scarce (or rare) and invest in that product.

For example, if you knew that half of the worlds oil supply was going to explode, then you know that item will become more scarce, and therefore more valuable. Also, if you knew that someone was going to discover the largest-ever iron deposit, then that item will become less scarce and less valuable.

The stock exchange is a very vast and vague subject and in reality, your question contain like a million questions. But basically, through analysis of the word "stock exchange" you get to know that it's an exchange of stock. Stock here could point to its literal meaning (something getting stocked, kept aside for later need).

Putting it simply, i'll give you an example of "company shares". Shares are units issued by a company in need of huge financing. Since this huge amount would not be granted by banks due to its size, it issues shares sold by unit to the public in the "primary" stock market, obviously where stock is sold for the first time. Once they're sold to the public, these shares are now owned by different people, which means that these people are majority or minority owners of the company, however they don't manage it of course but they're members in that company and they have different rights depending on the kind of stock they own. These shares, then, could change hands (ownership) easily in the secondary stock market where the word exchange comes in the spot light.

There are different kinds of stock, each of which has its own characteristics, advantages, disadvantages both to the company and the shareholder.

Kinds of stock are: Shares, bonds, hybrids, derivatives, options, etc.

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