Stock exchanges are platforms that allow investors to buy and sell stocks in a venue that is regulated and transparent. These exchanges enable investors of all stripes to trade stocks and other securities, potentially benefiting from a stock’s share price appreciation and dividend payments.
Stock exchanges help the stock market work, and are a big part of the overall economy. Understanding stock exchanges and how they work may help you how they affect you and your investments.
What Is a Stock Exchange?
A stock exchange is a marketplace where the shares of publicly-traded companies are bought and sold between investors.
Exchanges are generally organized by an institution or association that hosts the market, like the New York Stock Exchange or Nasdaq. These organizations and government regulators – like the Securities and Exchange Commission (SEC) in the U.S. – set up the rules and regulations of what companies investors can trade on a stock exchange.
If a company is “listed” on an exchange, it means that the company can be traded on that exchange. Not all companies are listed because each exchange regulates which companies meet their requirements. Companies not listed on the exchange are traded over-the-counter, or OTC for short.
Investors who want to buy or sell stocks commonly trade through an investment broker, a person or entity licensed to trade on the exchanges. Brokers aim to buy or sell stock at the best price for the investor making the trade, usually earning a commission for the service. Most investors will now use online brokerage firms for this service, paying little to no commissions for trades.
Historically, stock exchanges were physical locations where investors came together on a trading floor to frantically buy and sell stocks, like what you may have seen in the movies or on TV. However, these days, more often than not, stock exchanges operate through an electronic trading platform.
Major Stock Exchanges
| 10 Largest Stock Exchanges by Market Capitalization of Listed Companies | ||
|---|---|---|
| Exchange | Location | Market capitalization (in trillions)* |
| New York Stock Exchange (NYSE) | U.S. | $28.8 |
| Nasdaq | U.S. | $25.43 |
| Euronext | Europe | $7.15 |
| Shanghai Stock Exchange | China | $6.52 |
| Tokyo Stock Exchange | Japan | $6.25 |
| London Stock Exchange | U.K. | $5.63 |
| Shenzhen Stock Exchange | China | $4.29 |
| National Stock Exchange of India | India | $4.53 |
| Hong Kong Exchanges | Hong Kong | $3.97 |
| Saudi Stock Exchange | Saudi Arabia | $2.86 |
| *As of August 2024 | ||
Why Do We Have Stock Exchanges?
Stock exchanges exist because they provide a place for buyers and sellers to come together and trade stocks. Stock exchanges are also important because they provide a way for businesses to raise money. When companies issue stock to raise capital, investors will then trade the company’s shares on the stock exchange in which it is listed.
The individual stock exchanges set the rules for how stocks are traded. Stock exchanges are also regulated markets, which means that a government agency oversees the activity on the exchange. These rules and regulations provide a level of safety for investors and help to ensure that the market is fair, transparent, and liquid.
💡 Not sure what a stock is? Here we explain what stocks are and how they work.
What Is the Stock Market?
The stock market is made up of a network of different stock exchanges, including OTC markets, and the companies that are traded on these exchanges.
When you hear mentions of the stock market and its performance, it is usually in reference to a particular stock market index, like the S&P 500 or Dow Jones Industrial Average. However, the stock market is more than the specific companies that make up these stock market indices.
Generally, stock markets facilitate the buying and selling of shares between companies and institutional investors through initial public offerings (IPOs) in the primary market. Once a company has an IPO, the company’s shares are traded in secondary markets, like stock exchanges.
Stock Market Volatility
Volatility in the stock market occurs when there are big swings in share prices. Share prices can change for various reasons, like a new product launch or the most recent earnings report. And while volatility in the stock market usually describes significant declines in share prices, volatility can also happen to the upside.
Pros of the Stock Market
As mentioned above, the stock market allows companies to raise capital by issuing shares to investors. Raising money was one of the main reasons why stock issuances and trading began. It allows businesses to raise money to expand a business without taking out a loan or issuing bonds.
And because investors can own shares of companies, they can benefit from the growth and earnings of a business. Investors can profit from a company’s dividend payments, realize a return when the stock’s price appreciates, or benefit from both. This helps investors build wealth.
The relationship between stock markets, companies, and investors has arguably led to more economic efficiency, allowing money to be allocated in more productive ways.
Cons of the Stock Market
For companies, issuing shares on the stock market may be onerous and expensive due to rules and regulations from the stock exchanges and government regulators. Because of these difficulties, companies may be wary of going through the IPO process. Instead, they are more comfortable raising money in the private markets.
There are several potential risks associated with investing in the stock market. For example, the stock market is subject to market volatility, resulting in losses. Investors must be willing to take on the risks of losing money for the possibility of gains in the future.
Additionally, there is the potential for stock market fraud and manipulation by companies and investors, which harms individual investors, companies, and the economy.
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The Takeaway
A stock exchange is a marketplace where investors can buy and sell stocks or other securities, and where companies can list shares to try and raise capital. There are numerous stock exchanges, but the biggest in the U.S. are the New York Stock Exchange, and the Nasdaq.
Knowing the ins and outs of stock exchanges and how they influence the broader stock market may help you become a better-informed investor. Further, by learning about stock exchanges, their different rules, and their advantages and disadvantages, you may better understand the stock market as a whole. This may allow you to invest confidently and prepare for future stock market volatility.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
What is the stock market?
The stock market is a collection of markets where stocks are traded between investors. It usually refers to the exchanges where stocks and other securities are bought and sold.
What are the benefits of investing in the stock market?
Some benefits of investing in the stock market include the potential for earning income through dividend payments, experiencing share price appreciation, and diversifying one’s financial portfolio beyond cash. Note, however, that there are significant risks associated with investing in the stock market, too.
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