Stock Exchanges Explained
Discover where stocks are traded and how exchanges facilitate buying and selling.
Learning Objectives
- Understand what stock exchanges are and their purpose
- Learn about major exchanges like NYSE and NASDAQ
- Understand how exchanges match buyers with sellers
- Recognize the difference between exchange types
Stock Exchanges Explained#
When you decide to buy or sell a stock, where does that transaction actually happen? Stock exchanges are the organized marketplaces that make stock trading possible, connecting millions of buyers and sellers every day.
A stock exchange is an organized marketplace where securities like stocks are bought and sold. Think of it as a highly regulated auction house where prices are determined by supply and demand.
What Do Stock Exchanges Do?#
Stock exchanges serve three critical functions in the financial system:
| Function | Description |
|---|---|
| Facilitate Trading | Match buyers with sellers efficiently |
| Ensure Fair Prices | Create transparent, competitive pricing through open bidding |
| Regulate Markets | Enforce rules to protect investors and maintain market integrity |
Without exchanges, buying and selling stocks would be chaotic, you'd have to find individual sellers and negotiate each deal privately.
Major U.S. Stock Exchanges#
New York Stock Exchange (NYSE)#
The NYSE is the world's largest stock exchange by market capitalization. Located on Wall Street in New York City, it has been operating since 1792.
Key Facts:
- Market Cap: Over $25 trillion in listed companies
- Listed Companies: Approximately 2,400
- Trading Style: Hybrid (electronic + floor traders)
- Notable Listings: Walmart, JPMorgan Chase, Coca-Cola, Johnson & Johnson
The NYSE is known for its iconic trading floor where designated market makers help maintain orderly trading. While most trading is now electronic, the floor traders still play a role during volatile periods.
NASDAQ#
The NASDAQ was the world's first electronic stock exchange, founded in 1971. It's particularly known for technology companies.
Key Facts:
- Market Cap: Over $20 trillion in listed companies
- Listed Companies: Approximately 3,300
- Trading Style: Fully electronic
- Notable Listings: Apple, Microsoft, Amazon, Google, Meta, NVIDIA
NYSE vs. NASDAQ
A common misconception is that one exchange is "better" than the other. Both are highly regulated and reputable. Companies choose based on listing requirements, fees, and prestige preferences.
Other Major World Exchanges#
Stock trading is a global activity. Here are some of the world's largest exchanges:
| Exchange | Location | Specialty |
|---|---|---|
| Tokyo Stock Exchange | Japan | Largest in Asia |
| London Stock Exchange | UK | Major European hub |
| Shanghai Stock Exchange | China | Chinese domestic companies |
| Hong Kong Stock Exchange | Hong Kong | Gateway to Chinese markets |
| Euronext | Pan-European | Multiple European countries |
How Exchanges Match Trades#
When you place an order to buy or sell stock, here's what happens:
- Order Submission: Your broker sends your order to the exchange
- Order Book: The exchange adds your order to its "order book" of all buy and sell orders
- Matching: The exchange's system matches compatible buy and sell orders
- Execution: When a match is found, the trade executes
- Confirmation: Both parties receive confirmation of the completed trade
This entire process typically takes milliseconds for actively traded stocks.
Liquidity Matters
Liquidity refers to how easily you can buy or sell a stock without significantly affecting its price. Major exchanges provide high liquidity because millions of buyers and sellers participate.
Exchange vs. Over-the-Counter (OTC)#
Not all stocks trade on major exchanges. Some trade in the over-the-counter (OTC) market:
| Feature | Exchange-Traded | OTC |
|---|---|---|
| Regulation | Strict listing requirements | Less regulated |
| Transparency | Real-time pricing | Less transparent |
| Company Size | Usually larger, established | Often smaller companies |
| Liquidity | Generally higher | Often lower |
| Risk Level | Generally lower | Higher risk |
OTC stocks (sometimes called "penny stocks") are generally riskier and harder to trade. Beginners should typically stick to exchange-listed stocks.
Listing Requirements#
To be listed on a major exchange, companies must meet specific requirements:
NYSE Requirements (examples):
- Minimum share price of $4
- At least 400 shareholders
- Market cap of at least $100 million
- Annual earnings thresholds
NASDAQ Requirements (examples):
- Minimum of 1.25 million publicly traded shares
- At least 450 shareholders
- Minimum bid price of $4
- Various financial thresholds based on listing tier
These requirements help ensure that listed companies meet certain quality standards, providing some protection for investors.
Why This Matters to You#
Understanding exchanges helps you:
- Know where your stocks trade: Most major companies are on NYSE or NASDAQ
- Understand pricing: Exchange prices are the most reliable market prices
- Avoid risky markets: Be cautious of stocks not listed on major exchanges
- Compare exchanges: Some brokers may route orders differently
When you place a trade through your brokerage, they handle the exchange routing for you. But knowing the system gives you a better understanding of how your investments work.
Key Takeaways
- Stock exchanges are organized marketplaces that match buyers and sellers
- The NYSE and NASDAQ are the two largest U.S. exchanges
- NYSE uses a hybrid system; NASDAQ is fully electronic
- Exchanges provide liquidity, fair pricing, and investor protection
- OTC markets exist but carry higher risks for investors
- Listing requirements ensure a basic level of company quality