What is the London Stock Exchange (LSE)? Definition & Structure

what is the london stock exchange featured image

The London Stock Exchange (LSE) is one of the world’s oldest stock exchanges and the primary stock exchange in the United Kingdom.

Founded in 1801, the LSE enables companies to enter the equity markets to raise capital and facilitate the exchange of their financial assets. It offers different markets tailored to companies of different sizes and stages to list their shares.

As of May 2023, there were over 1,900 companies listed on the London Stock Exchange with a combined market capitalization exceeding £3 trillion, making it one of the largest stock exchanges globally. Its benchmark FTSE 100 Index is comprised of the 100 most valuable UK-listed blue-chip stocks.

How Does the LSE Work?

The London Stock Exchange fulfills several key functions:

Capital Raising Platform: The LSE gives companies access to deep capital pools via public listings to fund their growth and expansion projects.
Secondary Market Trading: Investors can trade securities like common shares, bonds, funds, and derivatives via the LSE’s electronic platforms.
Information Dissemination: The LSE provides real-time prices, news, and financial data to brokers, traders, analysts, and investors to make informed decisions and disseminate this information among their customers.
Risk Transfer: Derivatives and options contracts traded on the LSE enable risk transfer from hedgers to speculators.

The exchange matches buy and sell orders electronically through trading systems like SETS. Market makers provide liquidity, while regulators oversee that operations are carried out in an orderly and fair manner. LSE member companies get fast transaction execution and access to capital, while listed firms gain prestige and widen their investor bases.

How is the London Stock Exchange Structured?

The London Stock Exchange Group is segmented into four different markets that cater to companies of various sizes and stages of development. In addition, different types of securities are commercialized in each market to fulfill companies’ funding requirements and the market’s needs.

Main Market: The LSE’s flagship market for large and well-established companies seeking premium listings. More than 1,000 companies are listed.
Alternative Investment Market (AIM): Caters to growing small and mid-cap companies. More than 3,000 companies from both the UK and other corners of the world are listed on AIM.
Professional Securities Market (PSM): This market lists sophisticated financial instruments like convertible debt securities and depositary receipts.
Specialist Fund Segment (SFS): Hosts investment funds that market their shares to professional investors. There are currently more than 30 funds listed in this segment. They oversee more than $14.5 billion in assets, according to the latest statistics.

Additionally, the LSE offers dedicated indexes, various trading platforms like Turquoise and electronic bond trading venue MOT, and an array of tradable products from common shares to exchange-traded funds (ETFs).

When Was the LSE Founded?

The origins of the London Stock Exchange can be traced back to the 17th century when stock trading occurred in coffee shops. Broker John Castaing began publishing a list of stock and commodity prices at Jonathan’s Coffee House in 1698.

The first regulated London Stock Exchange opened its doors on March 3, 1801, through an agreement between 150 brokers to form a rule-based exchange. This paved the way for formal stock trading in the City of London.

It obtained its royal patronage in the mid-19th century, becoming the Stock Exchange of Great Britain and Ireland. The exchange kept growing in line with Britain’s expanding economy to become one of the world’s largest bourses.

Big Bang deregulation in 1986 ushered in dramatic changes, including automated electronic trading and opening up memberships to foreign firms. This marked the transformation of the LSE into a modern exchange that competes in the global arena.

Who Owns and Operates the London Stock Exchange?

The London Stock Exchange is owned by the London Stock Exchange Group Plc (LSEG). LSEG operates several leading capital markets infrastructure providers along with the LSE.

Key assets owned by the LSEG include:

FTSE Russell indexes.
LCH clearing houses.
Turquoise global trading venue.
Refinitiv data and analytics.

LSEG generates revenues from listings, trading, clearing services, and market data/analytics fees. During the 2022 fiscal year, the LSEG generated a total income of £7.7 billion and had more than 24,000 employees. LSEG shares trade on the LSE under the ticker symbol LSEG.

What Companies Are Listed on the London Stock Exchange?

As Europe’s leading equities exchange, the London Stock Exchange hosts a diverse mix of companies. Leading UK blue chips in the FTSE 100 Index include:

Shell
AstraZeneca
HSBC
Unilever
British Petroleum (BP)

The wider Main Market hosts more than 1,000 companies. Key sectors represented in this particular segment include energy, financial services, consumer staples, healthcare, and industrials.

The Alternative Investment Market (AIM) caters to less mature businesses belonging to sectors such as technology, oil & gas, financial services, biotech, and real estate. Leading constituents include Burford Capital and James Halstead Plc.

How to Invest in the London Stock Exchange?

While individual investors can’t directly invest in the exchange itself, they can gain exposure by:

Investment Method	Description
Buying stocks of LSE-listed companies	Investors can trade the shares of any of the thousands of companies listed in the LSE by using the services of authorized online brokers.
Trading exchange-traded products	ETFs and ETNs that track London benchmarks like the FTSE 100 provide exposure to the LSE and the overall performance of its listed shares.
Investing in LSEG shares	One can buy the publicly traded shares of the London Stock Exchange Group itself to gain exposure to the company that operates the exchange. LSEG trades on the LSE under the ticker symbol LSEG.

The Bottom Line

The London Stock Exchange is a well-established stock exchange globally that enables companies to access deep liquidity pools while providing investors with access to UK and international securities.

Both private and institutional capital turn to the multi-faceted LSE markets to incorporate European equities into their portfolio and gain exposure to companies within this developed economy.