What Are Stock Exchanges?

A stock exchange is a centralized marketplace where buyers and sellers of stocks meet to trade. Major exchanges like the New York Stock Exchange (NYSE) and Nasdaq provide the infrastructure for these trades, following financial regulations. Trades are typically executed through brokers or intermediaries directly accessing these exchanges.

Key Takeaways:

• Stock exchanges allow investors to buy and sell equities in a centralized location.
• Various financial instruments, including equities and bonds, are traded on exchanges.
• Companies make stocks available through an initial public offering (IPO).
• Exchanges exist in many countries, with major U.S. exchanges being the NYSE and Nasdaq.

How Exchanges Work

Stock exchanges facilitate trading equities, bonds, and other financial instruments by connecting investors with corporations and governments. They help ensure liquidity in the market, allowing for efficient and timely trades.

When a company goes public via an IPO, shares are offered to initial investors on the primary market. Once public, these shares are bought and sold on the secondary market, where most everyday investors trade. Stock prices are determined by bids (the highest price a buyer is willing to pay) and ask (the lowest price a seller will accept), with the difference known as the bid-ask spread.

Auction Exchanges

In an auction exchange, buyers and sellers simultaneously submit competitive bids and offers. The highest price a buyer is willing to pay and the lowest price a seller will accept dictate the current stock price. Trades are matched and executed when the prices align.

Auction markets, like the NYSE, were historically characterized by brokers and traders physically interacting on a trading floor in the “open outcry” system. Though most of this activity is now electronic, some auction-style exchanges, like the NYSE, still maintain physical trading floors. The NYSE Closing Auction is one of the busiest times of the trading day, where millions of shares are traded, determining the closing prices of stocks.

U.S. Stock Exchanges

New York Stock Exchange (NYSE)

The NYSE is the world’s largest equities exchange. It operates as an auction market, where specialists handle stock orders on a physical trading floor. Companies listed on the NYSE must meet stringent listing and compliance requirements, including maintaining an independent board of directors and an audit committee with financial expertise.

Nasdaq

Nasdaq is an electronic stock exchange where trades occur through a network of computers. Dealers or market makers maintain stock inventories and post bid and ask prices. Like the NYSE, Nasdaq has strict listing and governance requirements, and companies failing to meet these standards may be delisted to over-the-counter markets.

Over-the-Counter (OTC) Markets

OTC markets trade stocks of smaller companies or those delisted from more extensive exchanges. OTC stocks are generally riskier, less liquid, and more volatile, with fewer regulatory requirements. Notably, the Over-the-Counter Bulletin Board (OTCBB) was discontinued in 2021.

Alternative Trading Systems

Alternative Trading Systems (ATS), such as Electronic Communication Networks (ECNs), allow for electronic trading without being registered as a national securities exchange. ATS platforms include “dark pools,” where large orders are placed anonymously to minimize the market impact.

Global Stock Exchanges

Shanghai Stock Exchange (SSE)

The Shanghai Stock Exchange (SSE) is China’s largest stock exchange.

Shenzhen Stock Exchange (SZSE)

The Shenzhen Stock Exchange (SZSE) is another major Chinese exchange.

Euronext

Euronext is Europe’s largest exchange, initially formed by the merger of Amsterdam, Paris, and Brussels stock exchanges.

London Stock Exchange (LSE)

The London Stock Exchange (LSE) features the FTSE 100, a critical index of leading U.K. companies.

In 2024, India became the fourth-largest stock market globally, surpassing Hong Kong.

Cryptocurrency Exchanges

Cryptocurrency exchanges facilitate the trade of digital currencies like Bitcoin and Ethereum. Some of the most well-known platforms include:

• Coinbase: A U.S.-based cryptocurrency exchange that offers an advanced trading platform.
• Binance: A global cryptocurrency exchange with a daily trading volume exceeding $65 billion.

Regulation of U.S. Stock Exchanges

The U.S. Securities and Exchange Commission (SEC) regulates stock exchanges through the Division of Trading and Markets, ensuring fair, orderly, and efficient markets. The SEC oversees stock exchanges, broker-dealers, FINRA, and other market participants.

Stock Exchange vs. Stock Market

While a stock exchange refers to the specific infrastructure where stocks are traded, the stock market is a broader term encompassing all stocks available for trading within a region or globally. Indices, such as the S&P 500, often represent stock markets.

Purpose of a Stock Exchange

Stock exchanges enable companies to raise capital by issuing shares to investors. This helps companies fund their operations; in return, investors can profit from their investments.

The Bottom Line

Stock exchanges connect buyers and sellers, helping companies raise capital and investors build wealth. The NYSE and Nasdaq are the two major U.S. stock exchanges, requiring companies to adhere to strict governance and compliance standards. Understanding the function and structure of stock exchanges is critical for investing in stocks.