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What Are Stock Exchanges?
A stock exchange is a market where stock buyers connect with stock sellers. Shares are traded daily on the New York Stock Exchange (NYSE) or the Nasdaq. Stocks may be traded through a broker following financial regulations to deal with exchanges and the companies that trade.
Key Takeaways
- A stock exchange is a centralized location where investors can buy and sell equities.
- Various financial instruments are traded, including equities, commodities, and bonds.
- Stocks become available on an exchange after a company conducts its initial public offering (IPO).
How Exchanges Work
A stock exchange is where financial instruments are traded, including equities, commodities, and bonds. Exchanges bring corporations and governments together with investors. Exchanges help provide liquidity in the market, where trades can be processed efficiently without delays.
Shares of stock become available on an exchange after a company conducts its initial public offering (IPO). A company sells shares to an initial set of public shareholders in an IPO known as the primary market. After the IPO floats shares into the hands of public shareholders, these shares can be sold and purchased on an exchange or the secondary market.
The exchange tracks the flow of orders for each stock and relays the stock’s price. If a stock’s bid price is $40, an investor is willing to buy the stock for $40. At the same time, an asking price of $41 means a trader is willing to sell the stock for $41. The difference between the two is the bid-ask spread.
The general public can trade shares on the secondary market after a company’s initial public offering.
Auction Exchanges
Auction exchanges, or the auction market, are where buyers and sellers put in competitive bids and offers simultaneously. In an auction exchange, the current stock price is the highest price a buyer is willing to spend on a security, and the lowest price is what the seller accepts. Trades are matched, and the order is executed.
The auction market is also referred to as the open outcry system. Brokers and traders communicate physically and verbally on the trading floor or pit to buy and sell securities. Although this system has mostly been replaced by electronic trading, some exchanges still use the auction system, including the New York Stock Exchange (NYSE).
The NYSE Closing Auction is the last event of the trading day when the closing price for each stock is determined by bringing all buyers and sellers together to establish a price for those involved.
The NYSE closing auction is one of the busiest trading times in the U.S. equity markets when nearly 223 million shares are traded.
U.S. Exchanges
New York Stock Exchange (NYSE)
The New York Stock Exchange is the world’s largest equities exchange. The parent company of the New York Stock Exchange is the Intercontinental Exchange (ICE) as a result of the merger with the European exchange Euronext in 2007.
The NYSE remains one of the world’s leading auction markets, meaning specialists are physically present on its trading floors. Each specialist specializes in a particular stock, buying and selling the stock in the auction. Companies listed on the NYSE meet initial listing requirements and comply with annual maintenance requirements.
Investors who trade on the NYSE benefit from a set of minimum protections, which include a requirement that equity incentive plans must receive shareholder approval, the majority of the board of directors’ members must be independent, the compensation committee must be entirely composed of independent directors, and the audit committee must include at least one person who possesses “accounting or related financial management expertise.”
Nasdaq
The Nasdaq is where buyers and sellers are only connected by computers over a network. Nasdaq is one of the world’s leading electronic exchanges.Market makers, also known as dealers, carry their inventory of stock. They stand ready to buy and sell stocks on the Nasdaq and post bid and ask prices.
The exchange has listing and governance requirements similar to the NYSE. If a company does not maintain these requirements, it can be delisted to an over-the-counter (OTC) market.
Over-The-Counter (OTC)
The term over-the-counter (OTC) refers to trades on markets other than large organized exchanges. OTC markets generally list small companies or those delisted from other exchanges. The Over-the-Counter Bulletin Board (OTCBB) was an electronic community of market makers with no quantitative minimums for annual sales or assets required to list. The OTC Bulletin Board was closed in November 2021.
The term used for some OTC trading, Pink Sheets, doesn’t require companies to register with the Securities and Exchange Commission (SEC). Liquidity is often minimal, and these companies are not required to submit quarterly 10Qs.Some companies have deliberately switched to OTC markets to avoid the administrative burden and costly fees due to regulatory oversight laws such as the Sarbanes-Oxley Act.
Alternative Trading Systems
Electronic communication networks (ECNs) are part of an exchange class called alternative trading systems (ATSs). Regulated by the SEC, alternative trading systems electronically match orders for buyers and sellers. An ATS is not a national securities exchange but is considered a “dark pool.”
Dark pools are trading systems where users place orders without publicly displaying the size and price of their orders to other participants in the dark pool. An ATS may apply to the SEC to become a national securities exchange.
Global Exchanges
Many exchanges are located throughout the world, including:
- The Shanghai Stock Exchange (SSE) is the largest in mainland China. Many investments are traded on the exchange, including stocks, bonds, and mutual funds. The Shenzhen Stock Exchange (SZSE) is the second-largest stock exchange operating independently in China.
- Euronext is Europe’s largest stock exchange, and although it has undergone multiple mergers, it was initially formed by the mergers of the Amsterdam, Paris, and Brussels stock exchanges.
- The London Stock Exchange (LSE) is located in the United Kingdom.
- Within the LSE is the Financial Times Stock Exchange (FTSE) 100 Share Index. The “Footsie” contains the top 100 well-established publicly traded companies or blue-chip stocks.
- In 2024, India surpassed Hong Kong as the fourth-largest stock market in the world by market capitalization.
Digital Exchanges
Coinbase is the leading cryptocurrency exchange in the United States. Coinbase has an advanced trading platform that facilitates cryptocurrency trades for retail investors and custodial accounts for institutions. Although Bitcoin is the most popular cryptocurrency, others are traded via Coinbase, such as Ethereum and Litecoin. Coinbase is licensed as a cryptocurrency exchange in multiple U.S. states.Binance is a leading global exchange for cryptocurrencies with an average trading volume of 65 billion per day.
How Does the SEC Regulate Markets in the United States?
Within the U.S. Securities and Exchange Commission, the Division of Trading and Markets maintains standards for “fair, orderly, and efficient markets.” The Division regulates securities market participants, broker-dealers, stock exchanges, FINRA, clearing agencies, and transfer agents.
What Is the Difference Between Stock Exchange and Stock Market?
A stock exchange is a marketplace or the infrastructure that facilitates equity trading. On the other hand, a stock market is an umbrella term representing all stocks that trade in a particular region or country. A stock market is often represented as an index or grouping of various stocks, such as the S&P 500.
What Is the Purpose of a Stock Exchange?
A stock exchange brings companies and investors together. A stock exchange helps companies raise capital or money by issuing equity shares to be sold to investors. The companies invest those funds back into their business, and investors, ideally, profit from their investment in those companies.
The Bottom Line
Companies list equities or shares of stock on an exchange where buyers and sellers meet. The two main U.S. exchanges are the NYSE and the Nasdaq. Companies listed on either of these exchanges must meet various minimum requirements and baseline rules concerning their boards.