What Is a Stock Exchange?

Stock exchanges are places where stocks are traded. They allow investors to buy and sell shares of a company among each other in a regulated physical or electronic space.

What Is a Stock Exchange?

A stock exchange is just as likely to be a physical space as a virtual one because these highly regulated institutions are now dominated by electronic trading.

The listed stock exchanges in the United States are the New York Stock Exchange (NYSE) and the Nasdaq. The NYSE is at the top threshold and requires companies to maintain a share price of at least $4.

The Nasdaq was the first electronic exchange allowing investors to buy and sell stock electronically, without a trading floor. Companies that are selling shares to the public market for the first time with an Initial Public Offering (IPO) are most likely to use the Nasdaq. The letters are an abbreviation for the National Association of Securities Dealers Automated Quotations.

These OTC-traded shares typically will involve smaller (and riskier) companies, such as penny stocks that do not meet the listing requirements for established stock exchanges.

How a Stock Exchange Works

When a business raises capital by issuing shares, the owners of those new shares will want to sell their stake someday. Without a stock exchange, these owners would have to find a buyer by going to friends, family, and community members. The exchange makes it easier to find a buyer in what is known as the secondary market.

With a stock exchange, you will never know the person on the other end of your trade. It could be a retired teacher halfway around the world. It could be a multi-billion dollar insurance group, a publicly-traded mutual fund, or a hedge fund.

The exchange works like an auction and traders who believe a company will do well bid the price up, while those who believe it will do poorly bid it down. Buyers want to get the lowest price they can so they can sell for a profit later, while sellers are usually looking for the best price.

Notable Happenings

In the United States, on May 17, 1792, a group of 24 stockbrokers met under a buttonwood tree outside 68 Wall Street in New York City. They signed the now-famous Buttonwood Agreement, which effectively created the New York Stock & Exchange Board (NYSEB).

Almost three-quarters of a century later, in 1863, the NYSEB was officially renamed the New York Stock Exchange. These days, most people refer to it as the NYSE.

At one time, the U.S. had thriving regional stock exchanges that were major hubs for their particular part of the country. In San Francisco, for example, the Pacific Stock Exchange had an open outcry system where brokers would handle buy and sell orders for local investors who wanted to purchase or liquidate their ownership stakes.

Most of these were shut down, purchased, absorbed, or merged following the rise of the microchip, which made electronic networks much more efficient for finding liquidity so that an investor in California could just as easily sell their shares to someone in Zurich.

Stock Exchanges Around the World