Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

What is a stock exchange? Understanding the marketplace where shares are bought and sold

What is a stock exchange? Understanding the marketplace where shares are bought and sold

When you think of buying stock, the first thing to understand is the stock market is actually made up of a network of exchanges.

It's on these regulated exchanges where a lot of action takes place. Stock exchanges are a major part of the market, and understanding how they work can give you a better handle on the inner workings of the stock market at large.


What is a stock exchange?


A stock exchange is a marketplace where you buy stocks, bonds, and other securities. It provides a platform for companies to sell stocks, and for investors to trade those stocks between each other — all within a regulated space that aims to make everything as efficient and transparent as possible.

There are many stock exchanges around the world, each catering to different markets. The NYSE, for example, is one of many stock exchanges in the world, but it's also the largest by market capitalization, which measures the total value of securities traded there.

Historically, stock exchanges were primarily physical spaces with men standing on a floor yelling buy and sell orders. These days, exchanges are largely virtual with computers matching buyers and sellers together. The Nasdaq, which began operations in 1971, is a prime example of an electronic exchange.

When a company is "listed" on an exchange, that means the company can be traded on it. Listing requirements vary by exchange, but include meeting minimum criteria, such as number of shareholders, earnings, and stock price.

In return for meeting these requirements, companies enjoy the prestige of being on a major stock exchange. Being listed on a popular exchange gives companies visibility within the global marketplace.


How does a stock exchange work?


To understand the basics of how a stock exchange works, it's helpful to understand the concept of primary and secondary markets.

*  Primary market: In a primary market, companies sell new shares of stocks to the public for the first time, such as an initial public offering (IPO). One of the most important things to note is in a primary market, securities are purchased directly from the issuing company.

*  Secondary market: After the issuance of new securities, the secondary market is where investors buy and sell securities to each other. This is where exchanges come in. The NYSE and the Nasdaq are both secondary markets. Secondary markets are essentially what's understood as the "stock market."

While an IPO on the primary market allows private companies to raise large amounts of capital, subsequent trading on the secondary market informs the current value of the stock through supply and demand.

Broadly speaking, a stock exchange can work as either an auction market or a dealer market.

In an auction market, traders bid on the price of a security based on how much they believe in its success, or how badly they want a stake in that company. Typically, buyers strive to get the lowest price possible, so that they can sell for a profit later, while sellers aim to be appraised appropriately.

In a dealer market, multiple dealers, or "market makers," post the prices at which they're willing to buy and sell a security, and the differences between the posted bid and ask prices illustrate the cost to investors. Market makers use their own capital to engage in the process and work to provide liquidity, making it quicker and easier to trade.

Trading through a stock exchange tends to be safer than the over-the-counter (OTC) market, where transactions take place directly between two parties rather than being facilitated by an intermediary. Generally, the OTC market is less regulated than a stock exchange and features smaller, riskier companies, like penny stocks.


Functions of a stock exchange


Securities are among the most intensely regulated industries in the US, and the SEC is responsible for regulatory oversight and investor protection.

More broadly, the government agency ensures that listed companies do not partake in fraud by overseeing the registering of new securities and coordinating appropriate filings, like quarterly earnings reports, so that companies remain transparent to potential buyers.

Stock exchanges serve a few key functions to both investors, traders, and listed companies.

*  Transparent securities pricing: Exchanges must ensure that buyers and sellers have access to accurate, up-to-date pricing and order information to make informed investment decisions. They play a major role in providing fair and transparent securities pricing, while also matching buyers and sellers efficiently.

*  Liquidity: Stock exchanges help new companies raise capital while providing instant order access to investors. Exchanges promote market liquidity, allowing for the rapid exchange of stock without significantly affecting its price.

*  Secure transactions: Although being accessible to many market participants is a crucial piece of the puzzle, it's also important that buyers and sellers are credible and appropriately verified. Stock exchanges ensure that participants meet necessary requirements and follow regulations as directed in order to reduce the risk of default.

*  Investor protection: Exchanges are accessible by both institutional and less experienced investors and must offer protections, like appropriately categorizing stocks by level of risk, to those with limited financial knowledge. This promotes consumer trust and protects less experienced investors from severe financial loss.

Important stock exchange participants


Stock exchanges have quite a few moving parts and everyone involved plays a specific and necessary role. Here's a breakdown of who's who:

*  Brokers: Brokers are professionals or firms that act as intermediaries between outside investors, who don't have access to the inner workings of the exchange, and the market. Brokers represent their clients' best interests, aiming to buy or sell at the price most beneficial to the investor, and are usually paid on a commission basis.

*  Dealers: Dealers are firms or individuals who execute trades for themselves, rather than for a client or third party, in an effort to maximize their own profits. Dealers make money by selling stocks at higher prices than they initially paid.

*  Market makers: Market makers are dealers who aim to increase the liquidity of the entire exchange, buying and selling a large-volume of stocks to ensure trades occur . This heightened liquidity benefits all parties involved by making trading more efficient.

*  Broker-dealers: As the name suggests, these individuals or firms are a combination of brokers and dealers, serving the interests of both themselves and their clients.

Major stock exchanges


There are many stock changes around the world. Here is a look at a few, along with their most current market cap.


The bottom line


Stock exchanges are physical or electronic spaces where shares of publicly traded companies are bought and sold in real-time. These exchanges are highly regulated and generally safer than the OTC market, because regulations make companies less likely to default in paying investors back.

Exchanges simplify the process of finding buyers and provide these investors with peace of mind with regards to a company's credibility since they regulate the companies listed on the exchange.

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Ukraine Declares De Facto War on Hungary and Slovakia with Terror Drone Strikes on Their Gas Lifeline
A monster hit and a billion-dollar toy empire
Animated K-pop Musical ‘KPop Demon Hunters’ Becomes Netflix’s Most-Watched Original Animated Film
Canada: Nurse Suspended and Fined 93 Thousand Dollars After Stating the World’s Most Well-Known Fact Since the Creation of Adam and Eve, That There Are Only Two Genders
Elon Musk tweeted, “Europe is dying”
Far-Right Activist Convicted of Incitement Changes Gender and Demands: "Send Me to a Women’s Prison" | The Storm in Germany
Hungary Criticizes Ukraine: "Violating Our Sovereignty"
Will this be the first country to return to negative interest rates?
U.S. Treasury Secretary Whitney Bessent Backs Stablecoins to Boost Treasury Demand
Spain to Declare Disaster Zones After Massive Wildfires
Three-Minute Battery Swap Touted as Future of EVs
Beijing Military Parade to Showcase Weapons Advances
U.S. Tech Stocks Slide on AI Boom Concerns
White House Confirms Talks Over Intel Stake
Trump Suggests U.S. Could Support Ukraine ‘By Air’
Trump Called Viktor Orbán: "Why Are You Using the Veto"
Horror in the Skies: Plane Engine Exploded, Passengers Sent Farewell Messages
AI in Policing: Draft One Helps Speed Up Reports but Raises Legal and Ethical Concerns
Shame in Norway: Crown Princess’s Son Accused of Four Rapes
Apple Begins Simultaneous iPhone 17 Production in India and China
A Robot to Give Birth: The Chinese Announcement That Shakes the World
Finnish MP Dies by Suicide in Parliament Building
Outrage in the Tennis World After Jannik Sinner’s Withdrawal Storm
Class Action Lawsuit Against Volkswagen: Steering Wheel Switches Cause Accidents
UK Government Tries to Sue 4chan for Breaching Online Safety Act
Dogfights in the Skies: Airbus on Track to Overtake Boeing and Claim Aviation Supremacy
Tim Cook Promises an AI Revolution at Apple: "One of the Most Significant Technologies of Our Generation"
Are AI Data Centres the Infrastructure of the Future or the Next Crisis?
Miles Worth Billions: How Airlines Generate Huge Profits
Cambridge Dictionary Adds 'Skibidi,' 'Delulu,' and 'Tradwife' Amid Surge of Online Slang
Zelenskyy Returns to White House Flanked by European Allies as Trump Pressures Land-Swap Deal with Putin
The CEO Who Replaced 80% of Employees for the AI Revolution: "I Would Do It Again"
"Every Centimeter of Your Body Is a Masterpiece": The Shocking Meta Document Revealed
Character.ai Bets on Future of AI Companionship
China Ramps Up Tax Crackdown on Overseas Investments
Japanese Office Furniture Maker Expands into Bomb Shelter Market
Intel Shares Surge on Possible U.S. Government Investment
Hurricane Erin Threatens U.S. East Coast with Dangerous Surf
EU Blocks Trade Statement Over Digital Rule Dispute
EU Sends Record Aid as Spain Battles Wildfires
Beijing is moving into gold and other assets, diversifying away from the dollar
China Requires Data Centres to Source Majority of AI Chips Locally, For Technological Sovereignty
Escalating Clashes in Serbia as Anti-Government Protests Spread Nationwide
Category 5 Hurricane in the Caribbean: 'Catastrophic Storm' with Winds of 255 km/h
Trump Backs Putin’s Land-for-Peace Proposal Amid Kyiv’s Rejection
Digital Humans Move Beyond Sci-Fi: From Virtual DJs to AI Customer Agents
YouTube will start using AI to guess your age. If it’s wrong, you’ll have to prove it
Jellyfish Swarm Triggers Shutdown at Gravelines Nuclear Power Station in Northern France
OpenAI’s ‘PhD-Level’ ChatGPT 5 Stumbles, Struggles to Even Label a Map
Zelenskyy to Visit Washington after Trump–Putin Summit Yields No Agreement
×