A stock exchange is a place where buyers and sellers can trade shares of stock that are traded either publicly or privately. The stock is a portion of ownership of a particular company, and investors can decide on how many individual stocks they wish to purchase or sell at a particular time.
Each country has its own stock exchange, where stocks of domestic and multinational companies are traded. The largest exchanges in the world are the New York Stock Exchange (NYSE), Amsterdam Stock Exchange, Toronto Stock Exchange, and Paris Bourse. Within the United States, there are smaller exchanges including the Boston Stock Exchange and the Philadelphia Stock exchange, which trade regional stocks.
A company will often have to meet a certain threshold of profit before it can be listed on a national or international stock exchange. Companies like Royal Dutch Shell are listed on many national stock exchanges because their profit margins qualify and their operations are located across the globe.
Are the Stock Market and The Stock Exchange the Same Thing?
The Stock Market more or less refers to the group of companies that decide to offer shares of their company on an exchange. The exchange is the infrastructure they used to do all of the trading. Think of the market as the owners of a fruit stand and the exchange as the owner of the farmer’s market where the fruit stands are located. Or you could look at a stock exchange as the point where the stocks are collected into one place and packaged for outside investors. Either way, a stock exchange functions to make the changing of stock easier for both parties involved.
In physical stock exchanges like the NYSE, stocks are sold in a three step process that beings with an exchange member placing an order manually. The order then goes to a floor broker who sends them to a post specialist on the trading floor. The post specialist will make the actual purchase and a stock is sold. The NYSE also provides virtual trading which is done over the internet. The NASDAQ, which is made entirely of technology stocks, is traded entirely over the Internet with no physical presence.
Why Companies use the Stock Exchange
Usually, a company will decide to publicly share fractions of ownership in the company as shares in a bid to raise funds and increase capital. After a company decides “to go public” the net worth of the company can change exponentially. As the price of a company’s stock increases, so do its revenue and overall economic health.
The size of an exchange reflects the economic growth of the company in which it is located. When companies are able to free up partial ownership of themselves to outside investor, money moves around a nation’s economy and the economic wealth of the country increases.
Stock exchanges are also a good way to minimize or even eliminated risk. Transactions conducted on an exchange are guaranteed from either party defaulting on the exchange of money or of ownership in the company.