Stock exchange definition

What is a stock exchange?

A stock exchange is a centralised location where the shares of publicly traded companies are bought and sold. Stock exchanges differ from other exchanges because the tradable assets are limited to stocks, bonds and exchange traded products (ETPs).

The main difference between using a stock exchange and over-the-counter (OTC) methods of trading stocks is that, on an exchange, transactions are mediated rather than taking place directly between two parties. This means that there are stricter regulations on investors and speculators, as well as on the companies listed.

Companies often need to meet specific standards before they can be listed on a stock exchange – these standards can vary depending on the stock exchange. For example, the NASDAQ requires companies to have a market value of $70 million before they can be listed, whereas the New York Stock Exchange requires a company’s value to be $100 million.

Examples of stock exchanges

There are numerous stock exchanges around the world. Some of the largest exchanges are the New York Stock Exchange (NYSE), the NASDAQ, and the Tokyo Stock Exchange (JPX). Other well-known stock exchanges include the London Stock Exchange (LSE), the Shanghai Stock Exchange (SSE) and the Bombay Stock Exchange (BSE).

Pros and cons of stock exchanges

Stock exchanges have a range of pros and cons for both the companies that are listed on them, and for the individuals seeking to trade on them.

Pros of stock exchanges

For a company, being listed on a stock exchange comes with a certain level of prestige. This is particularly true for older exchanges, such as Amsterdam, London and New York. Being listed on an exchange also means investors can buy shares in the company, which helps the company expand by raising funds.

By trading on a stock exchange, it is likely traders will be at less risk of counterparty default. This is due to the high levels of regulation on stock exchanges, which is something that OTC methods of trading lack.

Additionally, online brokerage firms have made it even easier for traders to access stock exchanges and gain the opportunity to profit from any short-term market movements.

Cons of stock exchanges

For a company, listing on a stock exchange can be time consuming and expensive. And once the company has listed, it will have to consider its responsibility to shareholders, who now have a stake in the company.

Trading on a stock exchange does not guarantee stability. Stock markets are susceptible to market volatility, which means that there can be dramatic swings in the price of stock, usually in response to political and economic events around the world.

Stock exchanges can also experience crashes. Although they are rare, stock market crashes can significantly reduce the value of stocks and lead to economic depressions that last for years.

Traders and investors can manage their exposure to stock market volatility by implementing a risk management strategy.