What is a stock exchange? Understanding the marketplace where shares are bought and sold

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Stock exchanges today are largely virtual as automated electronic trading becomes the norm.

  • A stock exchange is a central marketplace where stocks and other securities are traded, bought, and sold.
  • Exchanges can be either physical or electronic, but electronic exchanges are now the norm.
  • The main purpose of an exchange is to connect buyers and sellers, and to bring stability, transparency, and efficiency to the trading process.
  • Visit Business Insider’s Investing Reference library for more stories

A stock exchange is a place where shares of publicly traded companies are bought and sold in real-time, either physically or electronically.

When you think of buying stock, the first thing to understand is the stock market is actually made up of a network of exchanges. The leading stock exchanges in the US are the New York Stock Exchange (NYSE) and the Nasdaq.

It’s on these regulated exchanges where a lot of action takes place. Stock exchanges are a major part of the market, and understanding how they work can give you a better handle on the inner workings of the stock market at large.

What is a stock exchange?

A stock exchange is a marketplace where you buy stocks, bonds, and other securities. It provides a platform for companies to sell stocks, and for investors to trade those stocks between each other – all within a regulated space that aims to make everything as efficient and transparent as possible.

There are many stock exchanges around the world, each catering to different markets. The NYSE, for example, is one of many stock exchanges in the world, but it’s also the largest by market capitalization, which measures the total value of securities traded there.

Historically, stock exchanges were primarily physical spaces with men standing on a floor yelling buy and sell orders. These days, exchanges are largely virtual with computers matching buyers and sellers together. The Nasdaq, which began operations in 1971, is a prime example of an electronic exchange.

When a company is “listed” on an exchange, that means the company can be traded on it. Listing requirements vary by exchange, but include meeting minimum criteria, such as number of shareholders, earnings, and stock price.

In return for meeting these requirements, companies enjoy the prestige of being on a major stock exchange. Being listed on a popular exchange gives companies visibility within the global marketplace.

How does a stock exchange work?

To understand the basics of how a stock exchange works, it’s helpful to understand the concept of primary and secondary markets.

  • Primary market: In a primary market, companies sell new shares of stocks to the public for the first time, such as an initial public offering (IPO). One of the most important things to note is in a primary market, securities are purchased directly from the issuing company.
  • Secondary market: After the issuance of new securities, the secondary market is where investors buy and sell securities to each other. This is where exchanges come in. The NYSE and the Nasdaq are both secondary markets. Secondary markets are essentially what’s understood as the “stock market.”

While an IPO on the primary market allows private companies to raise large amounts of capital, subsequent trading on the secondary market informs the current value of the stock through supply and demand.

Broadly speaking, a stock exchange can work as either an auction market or a dealer market.

In an auction market, traders bid on the price of a security based on how much they believe in its success, or how badly they want a stake in that company. Typically, buyers strive to get the lowest price possible, so that they can sell for a profit later, while sellers aim to be appraised appropriately.

In a dealer market, multiple dealers, or “market makers,” post the prices at which they’re willing to buy and sell a security, and the differences between the posted bid and ask prices illustrate the cost to investors. Market makers use their own capital to engage in the process and work to provide liquidity, making it quicker and easier to trade.

Trading through a stock exchange tends to be safer than the over-the-counter (OTC) market, where transactions take place directly between two parties rather than being facilitated by an intermediary. Generally, the OTC market is less regulated than a stock exchange and features smaller, riskier companies, like penny stocks.

Functions of a stock exchange

Securities are among the most intensely regulated industries in the US, and the SEC is responsible for regulatory oversight and investor protection.

More broadly, the government agency ensures that listed companies do not partake in fraud by overseeing the registering of new securities and coordinating appropriate filings, like quarterly earnings reports, so that companies remain transparent to potential buyers.

Stock exchanges serve a few key functions to both investors, traders, and listed companies.

  • Transparent securities pricing: Exchanges must ensure that buyers and sellers have access to accurate, up-to-date pricing and order information to make informed investment decisions. They play a major role in providing fair and transparent securities pricing, while also matching buyers and sellers efficiently.
  • Liquidity: Stock exchanges help new companies raise capital while providing instant order access to investors. Exchanges promote market liquidity, allowing for the rapid exchange of stock without significantly affecting its price.
  • Secure transactions: Although being accessible to many market participants is a crucial piece of the puzzle, it’s also important that buyers and sellers are credible and appropriately verified. Stock exchanges ensure that participants meet necessary requirements and follow regulations as directed in order to reduce the risk of default.
  • Investor protection: Exchanges are accessible by both institutional and less experienced investors and must offer protections, like appropriately categorizing stocks by level of risk, to those with limited financial knowledge. This promotes consumer trust and protects less experienced investors from severe financial loss.

Important stock exchange participants

Stock exchanges have quite a few moving parts and everyone involved plays a specific and necessary role. Here’s a breakdown of who’s who:

  • Brokers: Brokers are professionals or firms that act as intermediaries between outside investors, who don’t have access to the inner workings of the exchange, and the market. Brokers represent their clients’ best interests, aiming to buy or sell at the price most beneficial to the investor, and are usually paid on a commission basis.
  • Dealers: Dealers are firms or individuals who execute trades for themselves, rather than for a client or third party, in an effort to maximize their own profits. Dealers make money by selling stocks at higher prices than they initially paid.
  • Market makers: Market makers are dealers who aim to increase the liquidity of the entire exchange, buying and selling a large-volume of stocks to ensure trades occur . This heightened liquidity benefits all parties involved by making trading more efficient.
  • Broker-dealers: As the name suggests, these individuals or firms are a combination of brokers and dealers, serving the interests of both themselves and their clients.

Major stock exchanges

There are many stock changes around the world. Here is a look at a few, along with their most current market cap.

Name Region Market Capitalization
New York Stock Exchange United States $25.6 trillion
NASDAQ United States $19.5 trillion
Shanghai Stock Exchange China $6.9 trillion
Euronext Stock Exchange Netherlands $6.8 trillion
Hong Kong Stock Exchange Hong Kong $6.1 trillion
Tokyo Stock Exchange Japan $5.6 trillion
Shenzhen Stock Exchange China $5 trillion
London Stock Exchange England $4.3 trillion
Toronto Stock Exchange Canada $2.9 trillion
Bombay Stock Exchange India $2.8 trillion

The financial takeaway

Stock exchanges are physical or electronic spaces where shares of publicly traded companies are bought and sold in real-time. These exchanges are highly regulated and generally safer than the OTC market, because regulations make companies less likely to default in paying investors back.

Exchanges simplify the process of finding buyers and provide these investors with peace of mind with regards to a company’s credibility since they regulate the companies listed on the exchange.

What is stock? Learn the basics of investing in a public companyA guide to stock market indexes: What they measure and how they can guide your investingA brokerage account is the first step to becoming an investor, allowing you to buy stocks, bonds, and other securitiesWhat are the hours of the stock market? Here’s when major exchanges around the world open and close

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What is the New York Stock Exchange? Understanding the biggest marketplace for investors in the world

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The New York Stock Exchange dates back over 200 years.

  • The New York Stock Exchange (NYSE) is the largest stock exchange in the world.
  • It is a marketplace for investors to buy and sell publicly traded stocks and securities.
  • The NYSE uses an auction-based system that connects buyers and sellers either through electronic trading or physical floor trading.
  • Visit Business Insider’s Investing Reference library for more stories.

What do you picture when you hear the words “stock exchange?” If the words invoke images of busy screens and suits on a bustling trading floor, the reality of the New York Stock Exchange (NYSE) isn’t too far off.

The NYSE is the world’s largest and most well-known stock exchange, with a market capitalization of around $24.5 trillion. It’s the trading home to some of the biggest companies, from prestigious blue-chip stocks to young and exciting high-growth stocks.

Understanding the inner workings of the NYSE can provide key foundational knowledge for investors.

What is the New York Stock Exchange?

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The NYSE facilitates the trade of corporate stocks and other securities.

The NYSE – also referred to as the “Big Board” – is the biggest stock exchange worldwide based on the market capitalization of its listed securities. Formerly operated as a private organization, the NYSE is now a publicly traded company owned by Intercontinental Exchange Inc. It’s ticker symbol is NYSE: ICE.

The NYSE’s headquarters is located on Wall Street in New York City, which is home to the exchange’s iconic physical trading floor. The NYSE provides a central marketplace for buyers and sellers to trade shares of stock in public companies – about 1.5 billion shares a day, to be exact.

The exchange lists many of the world’s biggest companies, with sectors including technology, healthcare, energy, financial services, and more. In fact, you’ll find that much of the S&P 500 and Dow Jones Industrial Average traded on the NYSE.

A brief history of the NYSE

The NYSE first opened on May 17, 1792, when a group of 24 stockbrokers signed the Buttonwood Agreement, a document outlining the rules and regulations of securities trading.

In the beginning there were only five listed securities compared to today’s 2,300 counting. The Bank of New York was the first stock listed on the NYSE.

In 1971, the NYSE officially became a not-for-profit corporation, and officially transitioned to a publicly traded company in 2006, which is what it remains today. It’s taken a series of mergers for the NYSE to garner the size and global traction it claims today. Among the most notable was its 2013 purchase by the Intercontinental Exchange Inc. (ICE), an organization that owns and monitors financial and commodity exchanges, in a deal worth $11 billion.

From stock market crashes dating back to 1929, to trading being halted for four days after the 9/11 attacks, the NYSE has faced many notable and historic challenges. In March 2020, the NYSE closed its trading floors and switched to all-electronic trading due to the coronavirus pandemic. To date, the floor remains only partially open.

How does the NYSE work?

General view of atmosphere during the NYSE opening bell ceremony at the New York Stock Exchange on December 15
The trading floor of the NYSE.

The NYSE operates as an auction, with floor brokers setting the “bid” price, or the price they’re willing to purchase a stock, as they buy shares on behalf of their clients. These clients can include banks, broker-dealers, hedge funds, mutual funds, day traders, and some high net-worth individuals.

On the other side of that relationship lies sellers, who submit an “ask” price that typically exceeds the bid price. Sellers are individuals or organizations that offer securities for purchase, like stocks, bonds, or commodities.

Then there are dealers, who serve as an intermediary between brokers and sellers, pocketing the difference between the bid and ask price as compensation for their work.

When a broker executes a selling order, it isn’t complete until a dealer finds another broker to purchase the order. Because of the complexity of the arrangement, not just anyone can trade on the floor of the stock market. All parties involved are required to attain NYSE approval and carry a trading license.

Over time, the NYSE has evolved and modernized its trading environment. Up until about the 1980s, the NYSE relied on the boisterous open outcry system to communicate trade orders through verbal and physical signals such as hand signals and shouts.

Today, electronic trading is the norm on the floor of the NYSE. The “dealer” is a computer that automatically connects buyers with interested sellers, who each get updated information electronically. However, floor traders are still around to facilitate high-volume trades and set pricing live when necessary.

NYSE listing requirements

Before a public company can be listed on the exchange, it must meet a few stringent requirements. In terms of structural standards, all listed companies are required to have a minimum of 400 shareholders and 1.1 million outstanding shares.

Financially, listed companies must have a share price of at least $4, with the market value of its publicly held shares reaching at least $40 million. On top of that, there are also profitability standards that must be met.

Listed companies are required to earn at least $10 million over the past three years and maintain a global market capitalization that meets or exceeds $200 million.

NYSE hours

The NYSE operates daily from 9:30 a.m. to 4:00 p.m. ET, excluding weekends and public holidays, with extended trading hours trading available, too.

The NYSE is well-known for its opening and closing bells, rung at 9:30 a.m. and 4:00 p.m. respectively, to mark the start and end of the trading day.

These used to be rung by floor managers, but the tradition has evolved into executives from companies listed on the exchange coming to ring the bells daily, often in accordance with relevant marketing events or new mergers or acquisitions.

The financial takeaway

The New York Stock Exchange is the world’s largest and most well-known exchange, facilitating between two and six billion trades per day. It operates following a complex auction-based system between three parties: dealers, sellers, and brokers.

Although the NYSE is a world-renowned exchange today, it’s taken time and expansion to earn the reputation it’s built.

What is the Nasdaq? Understanding the global stock exchange that’s home to the fastest-growing, most innovative companiesWhat is OTC? A beginner’s guide to over-the-counter markets, and the risks and rewards of investing outside the major stock exchangesA guide to stock market indexes: What they measure and how they can guide your investingWhat is a stock market correction? How to make sense of sudden drops in the market

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China has accused Trump of trying to start a new Cold War, after the New York Stock Exchange confirmed plan to delist three Chinese firms

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  • China on Saturday accused the Trump administration of attempting to “suppress” foreign companies, as the New York Stock Exchange moved to delist three China-based firms. 
  • Wang Yi, China’s foreign minister, said Trump’s economic policies amount to an “attempt to suppress China and start a new Cold War.” 
  • “This kind of abuse of national security and state power to suppress Chinese firms does not comply with market rules and violates market logic,” a spokesperson for the Chinese Ministry of Commerce said in a statement, according to Reuters
  • Visit Business Insider’s homepage for more stories.

China on Saturday accused the Trump administration of attempting to suppress foreign companies, as the New York Stock Exchange moved to delist three China-based firms. 

The delisting came after months of mounting pressure, including an accusation from President Donald Trump that China uses US markets to raise money for its military. 

“This kind of abuse of national security and state power to suppress Chinese firms does not comply with market rules and violates market logic,” a spokesperson for the Chinese Ministry of Commerce said in a Saturday statement, according to Reuters

Separately, Wang Yi, China’s foreign minister, said on Saturday that Trump’s policies amount to an “attempt to suppress China and start a new Cold War.” 

“China-US relations have come to a new crossroads, and a new window of hope is opening. We hope that the next US administration will return to a sensible approach, resume dialogue with China, restore normalcy to the bilateral relations and restart cooperation,” Wang said in an interview with state-sponsored Xinhua News Agency. 

President-elect Joe Biden has said the US should work closely with its global allies as disputes with China crop up. 

“And as we compete with China and hold China’s government accountable for its abuses on trade, technology, human rights, and other fronts, our position will be much stronger when we build coalitions of like-minded partners and allies to make common cause with us in defense of our shared interests and values,” he said last week in Delaware, according to his prepared remarks

Officials in Beijing on Saturday said they would take “necessary measures” to support delisted Chinese companies, according to Reuters. 

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Chinese President Xi Jinping, then-Vice President Joe Biden, Peng Liyuan and Jill Biden stand for the US National Anthem at Andrews Air Force Base in Maryland, September 24, 2015.

In November, President Donald Trump issued an executive order accusing Chinese officials of “increasingly exploiting” US markets. The order read: “Those companies, though remaining ostensibly private and civilian, directly support the [Chinese] military, intelligence, and security apparatuses and aid in their development and modernization.”

In December, US legislators passed the Holding Foreign Companies Accountable Act, a measure that requires listed firms to show proof they’re not owned or controlled by foreign governments. 

“Communist China has been the bully on the playground of America’s stock exchanges for years, and that stops today,” said Sen. John Kennedy, the bill’s author, in a statement.  

As a result, China Unicom Hong Kong, China Mobile, and China Telecom will each be delisted early this month, said the NYSE in a statement posted after markets closed on Thursday.

Trading in the company’s American Depositary shares will be suspended before markets open on January 7, according to the NYSE.

Each company is also listed in Hong Kong, according to Reuters. 

As of October, there were 217 China-based companies listed on the three biggest US stock exchanges, according to US statistics. Their total market value was about $2.2 trillion. 

 

 

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