What Is a Stock Exchange?
A stock exchange, also known as a securities exchange or bourse, is a marketplace where stockbrokers and traders come together to buy and sell various financial instruments. In this article, you will learn what stock exchanges are and how they are different from over-the-counter markets.
Stock exchange: Definition
Stock exchanges serve as continuous auction markets. Traders execute transactions either through open outcry (on the exchange floor) or via electronic trading platforms. While physical trading floors still exist, electronic communication networks have become more prevalent due to their speed and cost advantages.
Stock exchanges are vital components of overall stock markets. They provide liquidity, transparency, and a platform for price discovery. The New York Stock Exchange (NYSE) in Lower Manhattan is the world’s largest stock exchange by total market capitalization of its listed companies.
What can you trade on stock exchanges?
For a security to be traded on a specific stock exchange, it must be listed there. Listing requirements vary but typically involve financial stability, reporting standards, and adherence to regulations.
The instruments you can trade on stock exchanges include:
- shares of stock, which represent ownership in publicly traded companies;
- bonds, or debt securities issued by governments or corporations;
- derivatives, which are financial contracts whose value depends on an underlying asset (e.g., options and futures);
- unit trusts, or pooled investment products;
- other securities, such as exchange-traded funds.
Stock exchanges vs. OTC markets
Stock exchanges and over-the-counter (OTC) markets are two primary platforms where securities are traded. Here are the key differences between them.
| Stock exchange | OTC markets |
| Centralized Stock exchanges are centralized venues where securities are listed and traded. | Decentralized OTC markets do not have a central location. Instead, trading occurs directly between parties, often through a dealer network. |
| Highly regulated Subject to strict regulations and oversight by governmental bodies like the Securities and Exchange Commission in the United States. | Less regulated Generally less stringent regulatory oversight compared to stock exchanges. |
| Primarily equities Mainly trade stocks of companies, but also include other securities like bonds, ETFs, and derivatives. Often include larger, more established companies. | Variety of securities Trade a wide range of securities, including stocks, bonds, derivatives, and other financial instruments. Often include smaller, riskier companies, such as penny stocks, and various bonds. |
| Public access Easily accessible to the general public and retail investors. Operate during specific hours known as trading sessions. | Limited access Often less accessible to retail investors, with many trades occurring among institutional investors. However, trading can occur outside of regular market hours, providing more flexibility. |
| Strict listing requirements Companies must meet stringent listing requirements, including financial and governance standards, to have their securities traded on an exchange. | Less strict requirements Listing requirements are generally less strict, allowing smaller or less established companies to trade. |
| Auction market Trades are executed through an order matching system, where buy and sell orders are matched based on price and time priority. Many exchanges operate as auction markets, with opening and closing auctions to determine prices. | Dealer market Trades are typically executed through negotiations between buyers and sellers, often facilitated by dealers. OTC markets operate as dealer markets, where dealers provide liquidity by buying and selling securities from their own inventories. |
Understanding these differences can help investors choose the right market for their trading needs based on their risk tolerance, desired level of regulation, and need for liquidity.
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