What Is an Exchange?
Let me explain directly: an exchange is a marketplace where you can trade securities, commodities, derivatives, and other financial instruments. Its core function is to make sure trading is fair and orderly, while efficiently sharing price information for anything traded there. Exchanges provide a platform for companies, governments, and other entities to sell securities to investors like you.
Key Takeaways
- Exchanges serve as marketplaces for trading securities, commodities, derivatives, and other financial instruments.
- Companies can use exchanges to raise capital.
- To list on the New York Stock Exchange, a company needs at least $4 million in shareholder's equity.
- Over 80% of trading on the New York Stock Exchange happens electronically.
- The New York Stock Exchange dates back to 1792.
Exchanges Explained
You might encounter exchanges as physical locations where traders gather to do business, or as electronic platforms. Depending on where you are, they could be called a share exchange or bourse. You'll find them in most countries, with major ones including the New York Stock Exchange (NYSE), Nasdaq, London Stock Exchange (LSE), and Tokyo Stock Exchange (TSE).
Electronic Exchanges
In the last decade, trading has shifted entirely to electronic exchanges. Advanced algorithms handle price matching to keep things fair, without needing everyone on a central floor. Operations run through multiple networks, and while some orders might still process in physical spots like the NYSE, most trades are electronic, regardless of location. This has boosted high-frequency trading and complex algorithms in use.
Listing Requirements
Each exchange sets specific rules for companies wanting to list securities. Some are stricter than others, but basics include regular financial reports, audited earnings, and minimum capital. Take the NYSE: it requires at least $4 million in shareholder’s equity.
Exchanges Provide Access to Capital
If you're a company looking to grow, a stock exchange is how you raise capital. The first public sale of stock, known as an initial public offering (IPO), happens here. Being listed boosts your profile, potentially drawing in new customers, employees, and suppliers. Unlike relying on venture capitalists, which often means losing control—like having their rep on your board—exchange-listed companies keep more autonomy, as share buyers have limited rights.
Real-World Example of an Exchange
Consider the New York Stock Exchange, the most famous in the U.S., located on Wall Street in Manhattan. It started trading in 1792. The trading floor operates with continuous auctions from 9:30 a.m. to 4 p.m., Monday to Friday. Historically, brokers auctioned shares, but automation began in the 1990s, and by 2007, almost all stocks were electronic. Only a few high-priced stocks remain exceptions. Until 2005, you needed to own a seat to trade directly; now, seats are leased yearly.
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