Stock Exchanges Explained: How Stock Exchanges Work

A stock exchange is a trading platform where investors can buy and sell shares of publicly held companies. Exchanges are the primary marketplaces and structures that facilitate trading in the wider stock market, though people often use the terms "stock exchange" and "stock market" interchangeably.

A stock exchange is a regulated capital market where buyers and sellers can trade holdings in publicly held companies.

• Stockbrokers: The intermediary between buyer and seller is a stockbroker, or someone who arranges for sales based on listed stock prices.
• Electronic trading: In the modern stock market, nearly all stock trading is done electronically, and the industry's major brokerages handle most of it. Stockbroker websites are kept up-to-date with the latest market data, pricing, market capitalizations, and professional analysis.
• Types of securities: Investors can buy many types of securities on a stock exchange. These include individual stocks, corporate bonds, mutual funds, and exchange-traded funds (ETFs).
• Regulation: The U.S. Securities and Exchange Commission (SEC) oversees stock exchange activities. Franklin Roosevelt’s administration created this regulatory agency of the federal government in the aftermath of the 1929 stock market crash.
• Primary markets: A stock exchange serves as a primary market for a private company that wishes to "go public" by making an initial public offering (IPO). An IPO grants members of the public the chance to purchase shares in the company. The company then uses that investment money to grow and sustain its business. A company—along with its investment bankers—sets a share price for its IPO, after which the price rises and falls based on free-market economics. The company can list more stock in the future via mechanisms like a rights issue or a follow-on offer. It can also buy back shares from investors.
• Secondary markets: Once a company sells stock via an IPO, it may be traded among investors. This is known as a secondary market. As an asset class, publicly traded stock has high liquidity, which means it can be bought and sold in real-time via a stock exchange.

A company must complete several steps to get a direct listing on a stock exchange.

1. 1. Negotiate with stock exchanges. First, the company will negotiate with various stock exchanges to determine which one gets the listing. A company may need a certain market capitalization to be offered a listing. What's more, certain exchanges are commonly associated with certain financial sectors. The Nasdaq, for instance, is most famously associated with tech stocks.
2. 2. File an IPO. To become listed on a stock exchange, a company must file an IPO and issue public shares to investors.
3. 3. Enlist investment bankers. In almost all cases, an investment banker shepherds a company’s entry onto a stock exchange. These bankers specialize in public listings—an area of expertise that may be foreign to the average start-up founder.
4. 4. Commit to financial transparency. A listed company must file quarterly reports that offer full transparency of its finances. Public companies must also alert the public to notable personnel changes, such as the hiring or dismissal of a CEO.
5. 5. Adhere to regulations. Regulatory bodies like the US Securities and Exchange Commission (SEC) monitor publicly traded companies listed on stock exchanges. Failure to comply with SEC regulations can lead to expulsion from a stock exchange.

Some companies are further selected for specialized stock indexes, such as the Dow Jones Industrial Average (DJIA), which tracks the performance of 30 high-value listed companies. Similarly, the Standard and Poor's 500 Index (S&P 500 Index) tracks 500 of the largest companies listed on U.S. stock exchanges.

The world's financial markets have several major stock exchanges that make over-the-counter sales to investors around the world.

• New York Stock Exchange (NYSE): The most storied of the U.S. stock exchanges, the NYSE is located on Wall Street in Lower Manhattan. It traces its roots back to the famed 1792 Buttonwood Agreement (named because it was signed under a buttonwood tree) that established the stock exchange in New York City.
• Nasdaq: Among American stock exchanges, the Nasdaq is second only to the NYSE in terms of market capitalization. It is famous for its tech stocks, and in 1998 it became the first stock exchange to offer online trading.
• Chicago Board Options Exchange (CBOE): Established in 1973, the CBOE is the United States' largest options exchange. The Chicago Board of Trade regulates the CBOE.
• London Stock Exchange: This major stock exchange located in London offers derivatives and a bond market in addition to traditional stocks, mutual funds, and ETFs.
• Stock Exchange of Hong Kong: The Stock Exchange of Hong Kong (SEHK) has the largest market capitalization in the world. It lists over 2,500 companies.
• Shanghai Stock Exchange: The Shanghai Stock Exchange (SSE) is the largest stock exchange in mainland China and the fourth largest in the world by market capitalization.

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