Defining the stock exchange

Stock exchanges have been around for centuries albeit in slightly less sophisticated form than today. The essential principle of a stock exchange is to bring together, buyers, sellers, brokers, and market makers to facilitate trade of business ownership in the form of 'share' exchange. The stock exchange allows business owners to raise capital and gain market exposure, while also allowing investors and bankers to profit from the management and exchange of the ownership shares.

The New York Stock Exchange

Image source: Roland Weber

There are many kinds of exchanges such as commodities exchanges, futures exchanges, foreign currency exchanges, bond exchanges etc. Stock exchanges are markets in which shares of companies are bought and sold by shareholders, buyers and sellers. In the early 21st century 'Exchange Traded Funds' (ETF's) which are mutual funds traded on a stock exchange, also became tradable on stock exchanges.

Types of stock exchanges

Stock exchanges are traditionally a building in which licensed brokers, market makers, and dealers gather to buy and sell. A very large and traditional example of such an exchange is the New York Stock Exchange (NYSE) which is now called the New York Stock Exchange-EuroNext.

With the advent of widespread commercial computer technology, stock exchanges including the NYSE began to make use of electronic trading and research. This consequently gave rise to electronic exchanges such as the NASDAQ, a heavily technology weighted stock exchange i.e. many of the shares of companies traded on this exchange are those of technology companies.

The world's largest stock exchanges

The largest stock exchange in the World in terms of capitalization of companies traded within the exchange is currently the New York Stock exchange, however electronic exchanges such as Nasdaq are quickly increasing in terms of daily share volume.

Other well known stock exchanges include the London stock exchange, the Tokyo stock exchange and the Hong Kong stock exchange. Often stock exchange performances are measured by indexes which are groups of companies within an exchange, that are often "weighted" by total share price capitalization. Some of these indexes are the Dow Jones industrial average, Nikkei, Dax, and Hang Seng.

How stock exchanges work

Stock exchanges are themselves companies that are regulated by the Securities and Exchange Commission (SEC) within the United States and other regulatory bodies worldwide. Boards of Directors and/or executive groups manage the exchange as a business. Stock exchanges make their profits from charging registration fees to companies listed on the exchange, charging fees associated with volume of shares traded and by selling expensive licenses, also known as seats, to brokerage houses allowing them trading privileges that would otherwise be inaccessible.

Stock exchanges are usually closed on weekends, weeknights and certain national Holidays. However, after hours trading can and does occur at before the beginning of, and after the end of a typical trading day. The rules for after hours trading are different from normal trading hours rules and both volume and liquidity tends to be slower during these trading periods. Trading through stock exchanges is performed both electronically and at the exchange by brokerage firms, fund managers, individual investors, and other interested parties.

Liquidity of exchanges is facilitated by "market makers" and "specialists" who may be licensed seat holders and/or financial institutions that hold large volumes of shares and/or capital for the purpose of buying and selling. Market makers and specialists have some pricing power as they are able to offer bid/ask spreads for large volumes of shares. This is particularly noticeable for companies that do not trade in high volumes.

Stock markets are essentially a market in which exchange of business ownership takes place both electronically and physically. Business, financial institutions and investors have the opportunity to profit in stock exchanges whether it be capital generation, arbitrage or financial services.

Many stock exchanges exist world wide, the largest of which are monitored daily through indexes which are groups of companies' average stock prices and are usually, but not in all cases, weighted by market capitalization. Stock exchanges maintain liquidity i.e. quick exchange via the presence of market makers and specialists that hold larger amounts of shares and/or money for the purpose of generating revenue and enabling more efficient trade.

Sources:

1. http://en.wikipedia.org/wiki/Stock_exchange
2. http://www.nyse.com/
3. http://www.tdd.lt/slnews/Stock_Exchanges/Stock.Exchanges.htm
4. http://www.investorwords.com/2977/market_maker.html