What Is a Stock Exchange?

Stock Exchanges Explained in Less Than 5 Minutes

Definition

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.

Woman at computer monitoring stock data
Photo:

 Laurence Dutton / Getty Images

Definition and Examples of Stock Exchanges

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 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 in the name are an abbreviation for the "National Association of Securities Dealers Automated Quotations."

Note

If a stock does not trade on a listed exchange, it can still trade in the over-the-counter (OTC) market, which is a less formal and less regulated venue.

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

Stockholders will want to sell their stake someday. Without a stock exchange, these owners would have to find a buyer by going to friends, family, or 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 probably 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 that a company will do well will bid the price up, while those who believe that it will do poorly will 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).

Note

The need for convenience is what led to the establishment of the biggest stock exchange in the world.

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 United States 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 shares or liquidate their ownership stakes.

Most of these exchanges 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

Exchange Name Location 
New York Stock Exchange  New York City 
Nasdaq New York City 
Tokyo Stock Exchange / Japan Exchange Group  Tokyo, Japan
Shanghai Stock Exchange Shanghai, China
Hong Kong Exchange Hong Kong
Euronext France, Portugal, Netherlands, Belgium
Shenzen Stock Exchange Shenzen, China 
London Stock Exchange Group UK, Italy 
TMX Group  Toronto, Canada
BSE India Ltd.  Mumbai, India 

Key Takeaways

  • Stock exchanges are trading places to buy and sell stock.
  • They are as likely to be in a physical space as an electronic one, given the proliferation of electronic trading.
  • Companies may use an exchange to raise capital in the secondary market through an IPO.
  • Globalization means that a trade made in New York could involve a buyer in Zurich.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Vanguard. "Stock Exchanges." Accessed Dec. 12, 2021.

  2. New York Stock Exchange. "Choosing the Right Listing." Accessed Dec. 12, 2021.

  3. Library of Congress. "Wall Street and the Stock Exchanges: Historical Resources." Accessed Dec. 12, 2021.

  4. FINRA. "Unraveling the Mystery of Over-the-Counter Trading." Accessed Dec. 12, 2021.

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