Stock exchanges are platforms that allow investors to buy and sell stocks in a venue that is regulated and transparent. These exchanges enable investors of all stripes to trade stocks, potentially benefiting from a stock’s share price appreciation and dividend payments.
Stock exchanges help the stock market and are a big part of the economy. Understanding stock exchanges and how they work may help you understand how they affect you and your investments.
What Is a Stock Exchange?
A stock exchange is a marketplace where the shares of publicly-traded companies are bought and sold between investors.
Exchanges are generally organized by an institution or association that hosts the market, like the New York Stock Exchange or Nasdaq. These organizations and government regulators–like the U.S. Securities and Exchange Commission (SEC)–set up the rules and regulations of what companies investors can trade on a stock exchange.
If a company is “listed” on an exchange, it means that the company can be traded on that exchange. Not all companies are listed because each exchange regulates which companies meet their requirements. Companies not listed on the exchange are traded over-the-counter, or OTC for short.
Investors who want to buy or sell stocks commonly go through an investment broker, a person or entity licensed to trade on the exchanges. Brokers aim to buy or sell stock at the best price for the investor making the trade, usually earning a commission for the service. Most investors will now use online brokerage firms for this service, paying little to no commissions for trades.
Historically, stock exchanges were physical locations where investors came together on a trading floor to frantically buy and sell stocks, like what you may have seen in the movies or on TV. However, these days, more often than not, stock exchanges operate through an electronic trading platform.
Major Stock Exchanges
| 10 Largest Stock Exchanges by Market Capitalization of Listed Companies | ||
|---|---|---|
| Exchange | Location | Market capitalization (in trillions)* |
| New York Stock Exchange (NYSE) | U.S. | $24.68 |
| Nasdaq | U.S. | $19.5 |
| Shanghai Stock Exchange | China | $7.05 |
| Euronext | Europe | $5.90 |
| Tokyo Stock Exchange | Japan | $5.31 |
| Shenzhen Stock Exchange | China | $5.15 |
| Hong Kong Exchanges | Hong Kong | $4.57 |
| National Stock Exchange of India | India | $3.32 |
| London Stock Exchange | U.K. | $3.17 |
| Saudi Stock Exchange | Saudi Arabia | $3.15 |
| *As of July 2022; Source: Statista |
Why Do We Have Stock Exchanges?
Stock exchanges exist because they provide a place for buyers and sellers to come together and trade stocks. Stock exchanges are also crucial because they provide a way for businesses to raise money. When companies issue stock to raise capital, investors will then trade the company’s shares on the stock exchange in which it is listed.
The stock exchanges set the rules for how stocks are traded. Stock exchanges are also regulated markets, which means that a government agency oversees the activity on the exchange. These rules and regulations provide a level of safety for investors and help to ensure that the market is fair, transparent, and liquid.
? Not sure what a stock is? Here we explain what stocks are and how they work.
What Is the Stock Market?
The stock market comprises a network of exchanges, including OTC markets, and the companies traded on these exchanges.
When you hear mentions of the stock market and its performance, it is usually about a particular stock market index, like the S&P 500 or Dow Jones Industrial Average. However, the stock market is more than the specific companies that make up these stock market indices.
Generally, stock markets facilitate the buying and selling shares between companies and institutional investors through initial public offerings (IPOs) in the primary market. Once a company has an IPO, the company’s shares are traded in secondary markets, like stock exchanges.
