What is a stock exchange?

What’s on this page?

1. What is a stock exchange?
2. How to trade on a stock exchange
3. How is a stock exchange different to the stock market?
4. Stock exchanges vs over-the-counter (OTC) trading
5. How are share prices on stock exchanges set?
6. Pros and cons of stock exchanges

What is a stock exchange?

A stock exchange is a centralised location where the shares of publicly traded companies are bought and sold. The main advantage of a stock exchange is that transactions are mediated by the exchange 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. Stock exchanges differ from other exchanges because the tradable assets are limited to stocks and exchange traded products (ETPs).

A stock exchange is a secondary market where companies are publicly listed, which enables current and prospective shareholders to buy and sell company shares.

There are many shareholders holding stocks listed on the exchange. This means when you buy shares, you’re not buying them directly from the company but from current stockholders. And if you decide to sell your company shares, you’ll be selling them to interested investors and not directly to the company.

Examples of stock exchanges

• London Stock Exchange is the securities marketplace based in England, UK, with over 1900 listed companies²
• New York Stock Exchange (NYSE) is the world’s largest financial marketplace and other exchange-traded investments with over 2400 companies³
• NASDAQ (National Association of Securities Dealers Automated Quotations) is an American based stock market that handles electronic securities trading of over 3300 companies globally.⁴ It’s monitored by the US Securities and Exchange Commission (SEC)
• Shanghai Stock Exchange is the largest of three independent securities marketplaces based in the city of Shanghai, China, with over 2000 listed companies.⁵ The other two are the Beijing Stock Exchange and the Shenzhen Stock Exchange
• Hong Kong Stock Exchange is reportedly a world-leading capital raising venue and one of the fastest growing stock exchanges in Asia with over 2500 listed companies ^{6, 7}

How to trade on a stock exchange

Because stock exchanges set regulations on who may place trades, you have to sign up with a broker like us. You’ll place your orders with your broker, who’ll then execute them for you on the exchange.

Brokers charge fees for the services, so it’s important to bear that in mind before placing a trade. Learn more about our charges. To get started:

Learn more about share dealing and our managed portfolios

How is a stock exchange different to the stock market?

The stock exchange is a physical infrastructure – although accessible digitally – that enables buyers and sellers of shares to meet in a common place where their transactions can be regulated.

The stock market, on the other hand, is an all-encompassing term that refers to the non-physical place where financial transactions of listed companies take place. The transactions performed in the stock market are conducted through an exchange or over-the-counter (OTC) marketplace.

The two terms are often used interchangeably; however, they represent two different things. The stock market functions due to the existence of exchanges. Investors can track real-time pricing information from the stock exchange, then choose whether to buy or sell the shares in the market.

Stock exchanges vs over-the-counter (OTC) trading

OTC trading refers to the buying and selling of securities that aren’t conducted on a formal exchange venue or platform. Instead, it’s a decentralised market, where most trades are performed between two parties (the buyer and seller) and are often handled via a dealer network.

Unlike exchange-based trading, OTC trades are less regulated, which creates a range of opportunities – but also some risks, that you’ll need to bear in mind.

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

There are different ways that institutions get listed on an exchange, traditionally with an initial public offering (IPO), however some companies choose to list in alternative ways such as a direct listing or special acquisition purpose company (SPAC) merger.

How are share prices on stock exchanges set?

The stock exchange imitates the marketplace whereas the supply and demand of shares determines the market price. The seller of the stock will present the initial value and – like in an auction – there’ll be bids from buyers for the shares until they settle on the price.

The initial share price is set based on various factors, like the company’s expected long-term earning potential, which can attract or repel buyers. Over time, the performance of the company (tracked over four quarters of a fiscal year) can increase the price, especially when there’s a high demand.

Conversely, poor performances will have an adverse effect, in which investors could opt to sell their stock.

While internal events in the company can impact the share price such as a transition in management and quarterly performances, external changes in the market can also influence the value of the stock. For example, political and economic events can restrict or improve the company’s potential to meet its expected returns, which can impact the share price.

Pros and cons of stock exchanges

Before you get started trading or investing via the stock exchange, you need to consider the pros and cons of choosing this avenue:

Pros of stock exchanges

• You can get exposure to company stock via an exchange by buying shares to have equity ownership and earn dividends if the company grants them
• Several companies want to be listed on a stock exchange. A listing comes with a certain level of recognition and prestige. While there are many stock exchanges worldwide, the older ones like Amsterdam, London, and New York stock exchanges hold a certain esteem among the public
• The stock exchange is a heavily regulated entity, which lessens the risk for traders of counterparty default in comparison to OTC trading
• People who don’t have sufficient experience trading on the stock exchange can use the assistance of an online brokerage firm to gain exposure to company shares

Cons of stock exchanges

• Getting a company listed on a stock exchange typically takes time and money to complete. Once the company is listed on the stock exchange, it has responsibilities towards shareholders
• There’s no guarantee of stability when trading on the stock exchange. Every company stock can be positively or negatively impacted by market volatility because of political or economic events around the world
• While occurrences of the stock exchange crashing are few and far between, previous experiences of this event happening have had an impact on the value of stocks
• Like any investment, there’s risk of losing your capital if the company performs poorly. The sequence of events will include investors selling their stake in the company and the stock price will drop
  

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