Why do stock markets exist?

On one side are companies that need money to grow. On the other are people who want to invest their money. They are a natural fit, but first they have to find each other. And there have to be rules so nobody gets cheated. That is what an exchange is for: it brings supply and demand together in one place, under clear rules and official supervision.

Remember the pizzeria? A large company has the same goal, just with far bigger sums. It wants to build factories, fund research or expand abroad. To raise the money, it can go public. This is called an initial public offering, or IPO. The company sells shares to the public for the first time, and the money from that sale goes straight to the company. Later on, it can issue more new shares through a capital increase. In return, it has to publish its numbers and share control with its new co-owners.

Would you hand a company your money if you could never get it back? Probably not. The exchange makes sure you can sell your share to someone else at any time. That is the main reason people are willing to buy stocks in the first place. They know that if they need the money, they will find a buyer. Professionals call this liquidity. It simply means you can trade quickly at a fair price. Without an exchange, you would have to find a buyer yourself, like selling a used car. That takes time, and you would never quite know whether the price was fair.

Germany's main venue for shares is the Frankfurt Stock Exchange. Today nearly all trading there is electronic, through a system called XETRA. A computer matches buy and sell orders in fractions of a second. The exchange is under state supervision, and listed companies have to report on their business regularly. There are other venues too, such as Tradegate or the exchanges in Stuttgart and Munich. Many app-based brokers route orders to venues like these, which often trade into the evening.

You hear the name on the evening news almost every day. The DAX is neither a company nor an exchange. It is an index that tracks how Germany's 40 largest listed companies perform together, including SAP, Siemens, Allianz and Deutsche Telekom. When the DAX rises, those shares have gone up on a weighted average. It has been calculated since 1988 and started at 1,000 points. Many people use it as a kind of thermometer for Germany's big companies.

When buyers and sellers meet in the marketplace, they have to agree on a price. But who decides it? No single person. The price comes out of all the orders together. How exactly that works is the subject of the next chapter.