What Is the London Stock Exchange?

What actually is the London Stock Exchange, and what does it do?

2 women having a discussion with the text "The London Stock Exchange" and the Motley Fool Logo

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

Public companies in the UK typically have their shares listed and traded on the London Stock Exchange (LSE). It’s one of many financial markets, but how does it work exactly? And how many corporations does it house? 

Let’s explore.

What is the London Stock Exchange (LSE)?

The London Stock Exchange is one of the oldest exchanges in the world and the largest in Europe in terms of market capitalisation. As of September 2022, the total value of all the companies listed amounted to £3.58trn. The average daily trading volume ranges between 800,000 and 2m.

Four functions of the LSE

Today, the London Stock Exchange fulfils four main functions during the trading day:

  1. It fulfils its original function of providing companies with a forum for raising capital — by initial public offering (IPO, or “flotation”) and by later secondary issues
  2. It provides trading services by which investors can trade shares, and other instruments and commodities, with each other, via the intermediaries of their brokers and the LSE’s electronic trading systems (the main one being SETS)
  3. The LSE provides information — share prices, news and other information via its Regulatory News Service (RNS)
  4. It provides a derivatives market through its EDX service

Primary markets

Today, the London Stock Exchange provides two equity markets with different degrees of regulatory requirements (and so different margins of safety). 

Main Market

The Main Market is the one that everyone knows. It hosts the FTSE 100 index of the UK’s largest companies, together with various other indexes. These include the FTSE 250 (the 250 next largest), the FTSE Small Cap index of smaller companies, and others. 

Those three main indexes make up the FTSE All-Share index. This list of over 900 companies accounts for nearly 99% of the value of all of the UK’s public firms.

Alternative Investment Market

The LSE also operates the Alternative Investment Market (AIM). This has less stringent listing rules and is more affordable for companies to list on. Traditionally, it’s the home to smaller businesses. These days, quite a few of the largest AIM companies (on the AIM 100 index) have market values in hundreds of millions of pounds.

The LSE’s remaining two markets are the Professional Securities Market (PSM) and the Specialist Fund Market (SFM), which most private investors will never encounter.

When was the London Stock Exchange established?

The LSE as we know it today was first established in 1801 during the height of the industrial revolution. Its history, however, dates back to 1571 under the name of The Royal Exchange.

The industrial boom of the early 19th century saw the exchange grow, together with the need for regulatory activities governing the operation of brokers, the reporting of figures, the payment of dividends, etc.

Although it quickly grew to become one of the largest stock exchanges in the world, the actual operation of the LSE didn’t really change significantly until the late 20th century. 

It acted as a floor where brokers (or their agents) could meet face-to-face, publish prices, and enact deals by a method known as “open outcry”. Participants literally started shouting out prices and communicating by arm-waving gestures to arrive at deals.

The LSE’s landmark Stock Exchange Tower opened in 1971, housing what was one of the world’s largest share trading floors at the time. In October 1986, dubbed “Big Bang Day”, two major changes happened, both intended to boost the LSE’s waning competitiveness against the world’s other large exchanges.

Firstly, computer-matched, on-screen trading replaced open-outcry trading. This made things more efficient and cheaper to operate and, through greater transparency, reduced the possibility of price manipulation.

Secondly, the stock market was extensively deregulated, sweeping away the traditional “old boys’ network” and opening up trading to modern, free-market competition.

It’s because of these bold moves that we can check share prices as well as buy and sell investments through online brokers while eliminating the enormous commissions historically charged by full-service brokers.

Who owns the LSE?

The London Stock Exchange Group (LSE Group) owns and operates the London Stock Exchange. It’s a financial services business that owns several other stock market-related assets, including:

  • Refinitiv
  • LSEG Technology
  • FTSE Russell
  • LCH (London Clearing House)
  • Tradeweb Markets

How many companies are on the London Stock Exchange?

As of September 2022, a total of 1,970 companies are listed on the London Stock Exchange. The figure has been steadily decreasing since 2015 as the number of initial public offerings and direct listings hasn’t kept up with the number of acquisitions and insolvencies during this period.

How to buy stocks on the London Stock Exchange?

Like any other stock market exchange, the LSE can only be accessed through a registered broker. There are plenty of UK and international brokerage accounts that enable investors to buy and sell British shares. 

We’ve highlighted our top picks of share dealing accounts in this quick guide.

Where in London is the stock exchange?

The London Stock Exchange has had several locations over its lifetime. In the 17th and 18th centuries, stock brokers were considered too rude to enter the Royal Exchange. Trading actually took place in coffee shops like the famous Jonathan’s Coffee House on Change Alley.

Eventually, the exchange moved to Threadneedle Street in 1972. But since 2004, it’s been located in Paternoster Square.

How does the LSE make money?

There are several revenue channels for the London Stock Exchange. The bulk of its revenue comes from listing fees. Taking a company public isn’t free. An ongoing listing charge has to be paid, typically on a yearly basis.

Additional income is generated through technology services such as providing real-time data and trading prices. 

For traders and financial institutions, having access to real-time information is critical to success, and they’re willing to pay a high premium for it. 

For long-term investors, the tick-by-tick movement of stock prices is less important. This means demand for such information is low, as share price movements with a 15-minute delay can be accessed free of charge from numerous investing websites.

Should you invest in the London Stock Exchange?

Like any investment, buying shares in listed companies on the London Stock Exchange is ultimately a personal decision. 

For British investors, this is usually a standard move, given it is the local exchange operating in pounds. International investors must also consider foreign currency exchange rates. Even if a stock thrives and the share price increases, adverse movements in currencies can still result in an underperforming investment.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.