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An exchange is like a supermarket for investors. Here’s how it works.
What is an exchange?
An exchange is a marketplace where stocks, bonds, commodities, options and futures are traded. The main functions of an exchange are to maintain fairness and order among buyers and sellers, and to efficiently disseminate information about prices for any type of security that trades on that exchange.
The term “exchange” has several definitions.
- At a basic level, it refers to the act of giving something in order to receive another thing of equivalent value, such as exchanging cash for goods.
- In monetary terms, it can refer to trading one currency for its equivalent value in another currency.
- An exchange is also a physical place where commodities are traded, such as a grain exchange or a corn exchange.
The most common usage relates to a place where investors can buy or sell assets, such as commodities or stocks from companies that are listed on an exchange.
Like the supermarket, which sells different kinds of food all in one place, a stock exchange offers many different companies for investors to choose from. Securities are traded during specific hours on business days.
Companies are referred to as “listed” if they are traded on an exchange. Each exchange has certain requirements for a company to be listed. The majority of exchanges today require companies to have minimum levels of market capitalization, shares outstanding and annual income.
If securities are not listed on a stock exchange, they are typically sold over-the-counter, or OTC. Companies with shares sold over-the-counter are smaller and riskier, as they fail to meet the requirements to be included in a stock exchange listing.
Types of exchanges
Some countries, such as the United States, have multiple stock exchanges. The U.S. has the National Association of Securities Dealers Automated Quotation System, or NASDAQ; the New York Stock Exchange, or NYSE; and the American Stock Exchange, or AMEX, as well as several regional exchanges.
Transactions on NASDAQ happen through an electronic trading system over the internet, while transactions in the NYSE and other exchanges occur on the trading floor inside the stock exchange building.
It is important to note that stock exchanges do not own shares. Instead, they act as a marketplace where stock sellers connect with stock buyers. Investors generally buy and sell securities through a broker, whose responsibility is to deal fairly with customers in trading matters.
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