Stock exchange
A stock exchange is an organization that enables the buying and selling of shares in publicly traded companies, playing a critical role in the broader stock market. As a company’s perceived value fluctuates, so too does the value of its shares, which can affect investor decisions. Investors typically aim to purchase shares at lower prices and sell them once they appreciate, often using stock exchanges to maximize their returns. The New York Stock Exchange (NYSE) and NASDAQ are two of the largest stock exchanges globally, each operating under different mechanisms—NYSE relies on physical trading while NASDAQ operates electronically.
The origins of stock exchanges can be traced back to the 16th century when small business owners sought brokers and lenders in local markets. Over time, this evolved into formalized trading systems, including the establishment of notable exchanges like the London Stock Exchange. Today, stock exchanges not only facilitate stock trades but also serve as vital channels for companies to attract investors and for individuals to grow their savings. Other international exchanges, such as the Bombay Stock Exchange, also play significant roles in their respective markets, showcasing the global nature of stock trading.
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Stock exchange
A stock exchange is an organization that facilitates the purchase and sale of shares of corporations. As a corporation's perceived value shifts, the value of a corporation's shares can drastically change. Many stock exchanges also trade in bonds, funds, and other forms of investments. Stock exchanges are closely related to the stock market. The stock market is the entire market of shares that are available for trading. When most people trade on the stock market, they aim to buy a certain stock, hold onto it until it increases in value, and then sell it for more than they paid for it. Many people invest their long-term savings in the stock market in hopes that it will grow faster than if they simply allowed the money to accrue interest in a savings account.
Background
The first formalized stock trades took place in Belgium in the 1530s. They did not involve large, complicated international markets. Instead, they involved a local meeting place where small business owners could find brokers and lenders. Although some lenders negotiated for a share of the businesses' profits in exchange for loans, formalized stocks did not exist. These meeting places were the first stock economies, often called stock markets. They were the ancestors of modern stock exchanges.
The first stock to exist in its modern form was issued by the various East India trading companies. These companies distributed shares in exchange for startup funds. These shares paid dividends, or shares of the company's profits. Originally, this process dealt with temporary companies formed for single voyages. Captains looked for investors to help supply their ship and crew, promising a cut of the profits if the voyage was successful. However, the East India companies managed huge numbers of voyages at any given time. This allowed investors to invest money in the company instead of in individual voyages. Such investments carried substantially less risk. If a ship sank, investors lost only a small percentage of their expected profits. In many cases, they included it in their calculations as expected losses.
Company shares were issued as paper documents. Dividends were paid out to whoever possessed the paper. For this reason, company shares were commonly bought or sold. However, no definitive office or market for these shares existed. For this reason, most shareholders looking to sell their stock worked through a broker. Many of these brokers met in coffee shops throughout London to carry out trades. One of these coffeehouses was so popular among stockbrokers that it became an unofficial stock exchange. Eventually, the stockbrokers bought out the coffeehouse and turned it into an official place where stockbrokers could buy and sell stocks and make deals. That coffeehouse went on to become the London Stock Exchange.
Overview
Think of the stock market as all the products available for sale on the shelves of a store. On the stock market, these products are shares in companies. Think of the store itself as the stock exchange—the entity that allows sales of various products, or shares, to take place. Stock exchanges are organizations that facilitate the trade of company shares. An investor often makes use of a stock exchange to find the largest return on their investment. They buy shares at low prices, hoping that this investment will help the company grow and increase the value of those shares. Once the shares are worth a greater value than what the investor paid for them, the investor will consider selling them for a profit. Stock exchanges allow corporations to easily find investors and give investors an incentive to invest their capital.
The New York Stock Exchange (NYSE) and the NASDAQ are the two largest stock exchanges in the world. However, they function extremely differently. At the New York Stock Exchange, all purchases and sales are still handled physically. Dealers must be present on the stock exchange floor, trading with other dealers. The NASDAQ, in contrast, utilizes a telecommunications network for its trades. This allows dealers to work remotely, trading stock over electronic networks.
The NYSE is one of the best-known stock exchanges in the world. Located in New York City, it trades stock from more than 2,220 companies. Collectively, this stock exchange was worth almost $28.33 trillion in July 2024. Until 2000, firms that traded on the NYSE could not be traded on any other exchange. However, this was declared illegal by regulatory bodies. The company that owns the NYSE, NYSE Euronext, was purchased by the Intercontinental Exchange (ICE) in 2013.
The NASDAQ differs from the NYSE in a variety of ways. First, the NASDAQ has no physical location. NASDAQ trades are conducted entirely through electronic means. While the NYSE is an auction exchange, meaning that stockholders can sell directly to one another, the NASDAQ is a dealer's exchange. In an auction exchange, the highest bidding price is matched to the lowest asking price. In a dealer exchange, specified individuals arrange trades and purchases between buyers and sellers on the floor.
Another major difference between the two exchanges is the specific companies listed in each. The NYSE is a much older exchange than the NASDAQ, and its listing reflects that. It features older, well-established, stable firms. Many of these firms reliably offer slow, controlled growth. The NASDAQ, in contrast, lists many powerful technology firms and startups. Many of these companies rose to fame alongside computers and the Internet. They are viewed as more volatile than their competitors on the NYSE. However, many of these companies also provide opportunities for growth.
Many people think of the NYSE and the NASDAQ only as the means for facilitating the trading of shares. However, both are for-profit corporations in their own right. Until March 8, 2006, the NYSE had been a privately traded corporation. On that date, it went public, allowing shares of the NYSE itself to be traded on the stock exchange.
Although the NYSE and the NASDAQ are central to North America, other exchanges are popular in other parts of the world. For example, the Bombay Stock Exchange (BSE), founded in 1875, is similarly important to Asian markets. It claims to be the oldest stock exchange in Asia. Into the mid-2020s, the BSE ranked as the world's sixth-largest stock exchange, with a market capitalization exceeding $5 trillion.
Bibliography
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