Beginner’s Guide to Stock Exchanges: Instantly Understand Functions, Trading Hours, and Investment Basics

What Is a Stock Exchange? More Than Just a Market for Buying and Selling Stocks

Have you often heard in the financial news, “The market rose by this many points today” or “Taiwan stocks hit a new high”, but only had a vague idea about the core mechanism driving it all—the “stock exchange”? Many beginner investors think it is simply a place to buy and sell stocks, but in reality, its role is far more important. It is like the heart of the financial market, pumping capital like blood throughout the entire economy.

Textbook Definition of a Stock Exchange

Simply put, a securities exchange is a highly organized and strictly regulated marketplace. Here, listed companies’ stocks, bonds, ETFs, and other securities can be traded through an open, fair, and impartial mechanism. It provides a centralized platform for buyers and sellers, ensuring that every trade is executed at the most reasonable market price at the time.

Think of it as a giant supermarket:

• Products: Stocks, ETFs, and other financial instruments of listed companies.
• Sellers: Investors or companies wishing to sell their holdings.
• Buyers: Investors who are optimistic about a company’s prospects and want to buy its stock.
• Market Rules: Trading rules set by the exchange to ensure fairness and transparency for all participants.

Four Core Functions That Drive Economic Flow

The role of a stock exchange goes far beyond providing a trading venue. It plays a crucial part in the economic development of an entire country. Its four main core functions are:

1. The Best Channel for Corporate Fundraising (Capital Formation)
   When a promising company needs capital to expand its business or develop new technologies, it can raise funds from the public through an Initial Public Offering (IPO) on the stock exchange. This allows good companies to obtain the resources needed for growth, which in turn drives industry innovation and creates job opportunities.
2. Providing Liquidity
   Imagine if you bought real estate and suddenly needed cash, you might have to wait several months to sell. But through a stock exchange, the shares you hold can be converted into cash within seconds on a trading day. This “liquidity” makes investors more willing to put idle funds into the market, increasing the efficiency of capital utilization.
3. Price Discovery
   How is the price of a stock determined? It is through the matching of thousands of buy and sell orders in the stock exchange. When optimism prevails (stronger buying power), prices rise; conversely, when pessimism dominates (stronger selling power), prices fall. This process is called “price discovery,” and it instantly reflects the market’s consensus on a company’s value.
4. Economic Barometer
   The exchange’s “weighted index” (such as Taiwan’s TAIEX) functions like a thermometer for a nation’s economy. When the index rises, it usually signals market optimism about the overall economic outlook; when it falls, it may reflect underlying economic concerns. As a result, governments, companies, and investors all closely monitor index movements as an important reference for decision-making.

How Does a Stock Exchange Work? Unveiling the Mystery of Trade Matching

What really happens after you press the “buy” button on your broker’s app? How does your order find a seller and ultimately complete the trade? All of this is made possible by the stock exchange’s sophisticated and highly efficient “automated matching system”.

How Does an Investor’s Order Get Executed?

The overall process is roughly as follows:

1. Placing an Order: Through your securities account, you place a buy or sell order (entrustment) with your broker.
2. Broker Submits Order: After verifying your instructions, the broker sends the order to the stock exchange’s trading system.
3. Exchange Matching: The exchange’s central computer receives orders from brokers nationwide and matches them according to established rules.
4. Trade Confirmation: Once your order is successfully matched, the exchange reports the result back to your broker, who then notifies you.
5. Clearing and Settlement: On the second business day after the trade (T+2), the buyer must pay the purchase amount, the seller receives the proceeds, and the stock transfer is completed.

Principles and Priorities of Order Matching

To ensure fairness, the exchange’s matching system follows two golden rules:

• Price Priority:
  • Buy Orders: The higher the bid price, the higher the priority.
  • Sell Orders: The lower the asking price, the higher the priority.
• Time Priority Principle:
  • If multiple orders are placed at the same price, the order that enters the exchange system first will be executed first.

Simply put, the order with the “best price and earliest time” gets executed first. This mechanism ensures efficiency and fairness in the market, preventing any possibility of human manipulation.

Trading Hours of the Taiwan Stock Exchange

Understanding trading hours is a fundamental skill for investing. The Taiwan Stock Exchange (TWSE) trading hours are mainly divided into three phases, each with different matching rules:

Overview of Taiwan Stock Market Trading Hours

A Deeper Look at the Taiwan Stock Exchange (TWSE)

For investors in Taiwan or those following Taiwanese stocks, the Taiwan Stock Exchange (TWSE) is the most familiar and important financial institution. It is not only the core of Taiwan’s stock trading but also a reflection of Taiwan’s economic development.

History and Establishment of the Taiwan Stock Exchange

The Taiwan Stock Exchange was founded in 1961 and officially opened on February 9, 1962. From the early days of manual matching and chalkboard recording to today’s fully computerized trading system, the exchange has witnessed Taiwan’s transformation from an agricultural society into a technology hub. Its development history is almost equivalent to the modern economic history of Taiwan.

What Is the Weighted Index (TAIEX) and How Does It Reflect Market Trends?

The “Taiwan Stock Exchange Capitalization Weighted Stock Index” (commonly known as TAIEX or the Weighted Index) is what we hear referred to daily in the news as the “Taiwan market index”.

• Representation: It includes all common stocks listed on the exchange and calculates the index using each stock’s market capitalization as weight.
• Significance: The larger a company’s market cap (such as TSMC or Hon Hai), the greater its impact on the index when its stock price rises or falls. Therefore, TAIEX is considered the most important indicator for measuring the overall performance of Taiwan’s stock market and economic climate. When the index rises, it reflects strong performance among large-cap stocks and an optimistic market sentiment.

What Is the Difference Between Listed and OTC Companies?

In Taiwan, besides “listed” companies, you may have also heard of “OTC” companies. The main difference lies in the market where they are traded and the application requirements.

Listed vs. OTC Quick Comparison

It can be said that “listed” companies are the “main board” of the market, while “OTC” companies represent the dynamic “SME board”. Together, they form Taiwan’s vibrant capital market.

Conclusion

In summary, a stock exchange is not just a platform for stock trading, it is the core hub of a nation’s economy. By providing an open and fair trading mechanism, it effectively channels capital toward quality companies while giving investors the opportunity to share in the fruits of economic growth. From the matching system and trading hours to market indices, understanding the fundamentals of how a stock exchange operates is an essential step for every investor to graduate from the beginner stage and move toward steady investing.

The next time you see financial news reporting on the stock market, you will no longer be an outsider, you will clearly understand the market dynamics and economic significance behind those numbers. Now that you have built a solid theoretical foundation, the next step is to put this knowledge into action and take your very first step into investing!

Frequently Asked Questions (FAQ)

Can individual investors place orders directly with the stock exchange?

No. The members of a stock exchange are primarily major brokerage firms. Individual or institutional investors must open a trading account with a licensed broker, which then submits the orders to the exchange for execution. Brokers serve as the crucial bridge between investors and the exchange.

Why Does the Stock Exchange Have Price Limits?

The purpose of setting daily price limits (for example, 10% in Taiwan’s market) is to maintain market stability and prevent stock prices from experiencing excessive volatility in a short period of time. When major positive or negative news emerges, this mechanism gives investors time to pause and think rationally, helping them avoid panic selling or overly optimistic chasing. It ultimately contributes to the stability of the financial system.

What Are Bull and Bear Markets, and How Do They Relate to Stock Exchanges?

Bull Market and Bear Market are terms used to describe the long-term trends of the overall stock exchange market.

• Bull Market: Refers to a long-term upward trend in the market, where the exchange index continues to rise, market sentiment is optimistic, and investors generally expect stock prices to keep increasing.
• Bear Market: Refers to a long-term downward trend in the market, where the exchange index continues to decline, market sentiment is pessimistic, the economy may face a recession, and investors generally expect stock prices to keep falling.

These two terms vividly describe the overall health of the stock exchange and serve as important references for assessing the direction of the macroeconomy.

Besides Stocks, What Else Can Be Traded on a Stock Exchange?

Although stocks are the most well-known instruments, modern stock exchanges offer a wide variety of products. In addition to common shares, you can also trade:

• ETFs (Exchange-Traded Funds): Track specific indices, allowing you to invest in a basket of companies at once.
• Bonds: Debt securities issued by governments or corporations, generally carrying lower risk.
• Warrants: Derivatives that give holders the right to buy or sell an underlying stock at a specific price in the future.
• REITs (Real Estate Investment Trusts): Investment vehicles that allow small investors to participate in large-scale real estate projects.

How Are Opening and Closing Prices Determined?

In Taiwan’s stock market, both the opening price and the closing price are determined through a “call auction” mechanism. The opening price is set between 8:30 and 9:00 a.m. by gathering all buy and sell orders and selecting the price that results in the highest possible trading volume. The closing price, on the other hand, is the last transaction price at 1:30 p.m. If no trade occurs at that minute, the most recent transaction price before that time is used.