What Is a Stock Exchange?
A stock exchange is a place where securities are bought and sold. It is the physical apparatus of the stock market, much in the same way as a shopping center is an apparatus of the retail market that enables transactions to occur. Most countries with stable economies and a public business sector have a market for securities that is controlled by an exchange. The stock exchange imposes rules and regulations on the type and quality of securities that can be offered to the public for sale. It provides structure for a primary market for transactions from regulated entity to investor and a secondary market from investor to investor.
Securities are bonds, notes, and shares of stock that are offered for sale by public corporations and government entities to raise money in exchange for an equity or debt position. Every government that allows entities to raise money from the public puts regulations in place to protect investors against insider activities. There is normally no way for a public investor to be sure of the inner workings of a corporation, for example, without government regulation that requires the corporation to make standard disclosures. These disclosures allow investors to compare investment vehicles and make a decision with confidence.
Only those entities that comply with government regulations are allowed to offer securities on the public stock market. Eligible entities must offer their securities for listing on a stock exchange in order to provide a way for them to be bought and sold. The stock exchange imposes listing requirements that serve to control the quality of the public offering. Most exchanges require an entity to have minimum levels of shares outstanding, market capitalization, and annual income.
Some countries have multiple stock exchanges. For example, the US has the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ). Both offer the same basic functionality as securities shopping centers, but the NYSE operates according to a traditional format while the NASDAQ is an electronic exchange. Transactions that occur through the NYSE happen on the trading floor of a physical location of the stock exchange building, while transactions on NASDAQ occur through an electronic trading system in cyberspace.
A stock exchange services the primary and secondary securities market. It enables regulated entities to offer securities to investors through an initial public offering as the primary market and allows investors to resell securities to other investors as a secondary market. This functionality is indispensable to the country's financial industry because the quality and depth of investments in the business sector indicate consumer confidence in the country's prosperity as a whole. For many countries, the stock market is considered a barometer of the overall state of its economy.
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