DEFINITION:

A stock exchange is where people trade stocks. It's a place, either physical or online, where investors can buy and sell shares of a company with each other in a controlled and supervised way.

Key Takeaways

• Stock exchanges are markets where people trade stocks. These places allow individuals to buy and sell stocks.
• They can exist in physical locations or online due to the rise of electronic trading.
• Businesses sometimes utilize an exchange to collect money by offering their shares to the public for the first time (IPO) in the secondary market.
• Globalization implies that a trade carried out in New York might include a purchaser located in Zurich.

Definition and Examples of Stock Exchanges

A stock exchange can exist in physical or online spaces, but nowadays, electronic trading is more common. In the United States, major exchanges include the New York Stock Exchange (NYSE) and the Nasdaq.

The NYSE asks companies to maintain a share price of at least $4. On the other hand, the Nasdaq was the pioneer in electronic trading, allowing investors to trade stocks without a physical trading floor. Businesses going public for the first time often use the Nasdaq for their initial public offering (IPO). Nasdaq stands for "National Association of Securities Dealers Automated Quotations."

Stocks traded over-the-counter (OTC) usually involve smaller and riskier companies, like penny stocks that don't meet the requirements for established stock exchanges.

How a Stock Exchange Works

Stockholders often plan to sell their stocks at some point. In the absence of a stock exchange, they'd need to find buyers among friends, family, or local community members. However, a stock exchange simplifies this process by creating a "secondary market."

When trading on a stock exchange, the person buying your stock might be someone you've never met before. It could be someone from a different country or a big investment firm. The exchange operates like an auction: traders who think a company will do well try to raise the stock price, while those who predict poor performance try to lower it. Buyers aim for a low purchase price to sell later at a profit, while sellers hope for the best selling price.

Notable Happenings

In the United States, back on May 17, 1792, a gathering of 24 stockbrokers got together beneath a buttonwood tree at 68 Wall Street in New York City. They made a deal known as the Buttonwood Agreement. This agreement led to the formation of what we now call the New York Stock Exchange (NYSE).

Around 75 years later, in 1863, the NYSEB got officially renamed as the New York Stock Exchange, commonly known as the NYSE these days (Library of Congress).

In the past, the United States had several successful regional stock exchanges that were vital centers for their specific regions. For instance, in San Francisco, the Pacific Stock Exchange operated using an open-outcry system. Here, brokers managed buying and selling orders for local investors looking to buy shares or sell their ownership stakes.

However, many of these exchanges were closed, bought out, absorbed, or combined after the emergence of microchip technology. This advancement made electronic networks far more effective in finding liquidity. As a result, an investor in California could easily sell their shares to someone in Zurich due to the increased efficiency of electronic systems.

Stock Exchanges Around the World