A stock exchange is the central hub of market trading activity where buyers buy and sellers sell shares of companies. It allows anyone to invest and be a partial company owner with the ability to reap the benefits of growth.
In the past, stock exchanges were bustling physical locations — picture the crowded floor of the New York Stock Exchange, littered with order sheets. In fact, in 2000, the activity on the floor of the NYSE generated around 1.5 million pieces of paper each day.
However, those mountains of paper have largely disappeared. I’ve been on that floor for TV interviews plenty of times, but it’s become a remarkably sedate atmosphere. There’s plenty of elbow room now, and all that crushing background noise now feels like a dull hum.
How stock exchanges work
The companies listed on a stock exchange may be the main attraction, but the parties involved are what keep the exchange functioning smoothly. Specialists and market makers maintain an inventory of shares that they can use to provide liquidity to the market in times of high demand or company-specific news driving volume. This liquidity assures a buyer for every share sold, and shares available for every share investors want to buy.
Stock exchanges are fueled by the foundational economic principle of supply and demand, and the price of a stock fluctuates based on buying and selling activity. It’s all done electronically in a matter of seconds or fractions of a second.
In the U.S., stock exchanges typically operate between 9:30 a.m. and 4 p.m. EST on business days and are closed on major federal holidays. However, stock prices are never set in stone, even when closed. A company might announce the appointment of a new CEO. A quarterly earnings report may show that a company outperformed revenue expectations.
News of a product recall could surface. All that activity can impact what someone is willing to pay for a stock. Additionally, after-hours and pre-market trading — conducted when the exchanges are closed –— will sway a stock’s value.
Major stock exchanges to know about
Stock exchanges bring together buyers and sellers all over the world. Here’s a rundown of some of the largest exchanges fuel trading activity.
- New York Stock Exchange: The biggest stock exchange in the world with more than 2,300 listings and an average of 2.4 billion shares exchanged daily.
- Nasdaq: The first-ever electronic stock exchange, launched in 1971 and currently has more than 3,000 listings.
- Shanghai Stock Exchange: Nearly 1,800 listings and the largest exchange in emerging markets.
- Hong Kong Stock Exchange: More than 2,500 listings and a market cap of more than $46 trillion.
- London Stock Exchange: One of the oldest stock exchanges with more than 2,000 listings today.
- Tokyo Stock Exchange: The largest stock exchange in Japan with more than 3,600 listings.
In addition to trading stocks, there are exchanges for commodities such as the New York Mercantile Exchange. Other exchanges like the Chicago Board of Options Exchange and Montréal Exchange facilitate financial trading products known as derivatives.
How to buy stocks on a stock exchange
You don’t have to go to a physical location to buy stocks, nor do you need to know anyone who wants to sell you their shares personally.
Instead, you can easily open a brokerage account and place an order from your phone, tablet, or desktop. The transaction occurs on the stock exchange.
Before you buy, though, do your research. Online brokerages make buying stocks as simple as a few swipes and clicks.
Companies listed on major stock exchanges regularly release earnings reports that can offer insights into the state of their operations, and you can review historical data about past performance (except for those recent IPOs, which can be buzz-worthy names but come with the risk of a limited track record).
That will require some additional reading and work, but that’s the reality of smart financial management: If you’re going to invest your money, you should invest some of your time, too.