What Is a Stock Exchange?

Updated: Feb 23, 2022

Stock exchanges are marketplaces for the trading of stocks. They let investors to purchase and sell shares of a firm in a controlled physical or electronic environment.

What Is a Stock Exchange?

Because these highly regulated organizations are increasingly dominated by electronic trading, a stock market is just as likely to be a physical venue as it is a virtual one.

The New York Stock Exchange (NYSE) and the Nasdaq are the two major stock exchanges in the United States. The NYSE is the most stringent, requiring corporations to maintain a share price of at least $4.

The Nasdaq was the first electronic exchange that allowed investors to buy and sell shares without using a trading floor. The Nasdaq is most likely to be used by companies that are selling shares to the public market for the first time through an Initial Public Offering (IPO). The initials stand for National Association of Securities Dealers Automated Quotations.

📝Note: If a stock does not trade on a licensed exchange, it can nevertheless trade in the over-the-counter (OTC) market.

These OTC-traded shares are usually associated with smaller (and riskier) enterprises, such as penny stocks, that do not match the listing standards for established stock exchanges.

How a Stock Exchange Works

When a company raises money by issuing shares, the owners of those new shares will wish to sell their ownership at some point in the future. Without a stock exchange, business owners would have to rely on friends, family, and community members to locate a buyer. The exchange facilitates the secondary market by making it easier to find a buyer.

You will never know the person on the other end of your deal if you use a stock exchange. It may be a retired instructor from another country. A multibillion-dollar insurance company, a publicly listed mutual fund, or a hedge fund might all be involved.

The exchange operates like an auction, with traders who feel a firm will do well bidding up the price and those who believe it will perform poorly bidding down the price. Buyers often want the lowest possible price in order to resell for a profit later, whereas sellers typically seek the highest possible price.

Notable Happenings

On May 17, 1792, a group of 24 stockbrokers gathered under a buttonwood tree outside 68 Wall Street in New York City. They agreed to the now-famous Buttonwood Agreement, which effectively established the New York Stock Exchange (NYSEB).

📝Note: The need for ease led to the formation of the world’s largest stock market.

The NYSEB was renamed the New York Stock Exchange about three-quarters of a century later, in 1863. Most people now refer to it as the NYSE.

Historically, the United States had robust regional stock markets that served as significant centres for their respective regions. The Pacific Stock Exchange in San Francisco, for example, featured an open outcry system where brokers would handle buy and sell orders for local investors looking to purchase or liquidate their ownership shares.

Following the emergence of the microprocessor, which made electronic networks considerably more efficient for finding liquidity, most of them were shut down, acquired, absorbed, or amalgamated, so that an investor in California could just as readily sell their shares to someone in Zurich.

Following the rise of the microchip, which made electronic networks considerably more efficient for finding liquidity, most of them were shut down, acquired, absorbed, or amalgamated, so that an investor in California could just as readily sell their shares to someone in Zurich.

ARTICLE SOURCES

Vanguard. “Stock Exchanges.”
New York Stock Exchange. “Choosing the Right Listing.”
Library of Congress. “Wall Street and the Stock Exchanges: Historical Resources.”
FINRA. “Unraveling the Mystery of Over-the-Counter Trading.”

What Is a Stock Exchange?