Types of Stock Exchanges

What Are Stock Exchanges?

• Definition: Organized marketplaces for trading shares of ownership in companies.
• Role: Centralized locations for businesses to raise capital and for investors to trade securities.
• Importance: Vital for capital allocation and as economic health barometers.
• History: Originated in 17th-century Amsterdam; evolved into digital trading platforms.
• Key Concepts: Includes IPOs, market indices, primary vs. secondary markets.

How Exchanges Work

• Marketplace for Instruments: Primarily for trading equities and bonds.
• IPO Process: Stocks enter the market through an IPO in the primary market, then trade freely in the secondary market.
• Role of Market Makers: Provide liquidity, reduce volatility by quoting buy/sell prices.
• Price Determination: Based on supply and demand; bid-ask spread is a transaction cost.
• Modern Exchanges: Predominantly electronic with rapid transactions and real-time updates; NYSE has a physical trading floor.

Types of Stock Exchanges

Auction Exchanges

• Mechanism: Buyers and sellers put in competitive bids; prices determined by highest bid and lowest offer.
• Communication: Physical and verbal on the trading floor; NYSE still uses this system for closing auctions.

Dealer Markets

• Role of Dealers: Facilitate transactions by posting buy/sell prices, profit from bid-ask spread.

Electronic Exchanges

• Operation: Fully online without physical location; rise of high-frequency and algorithmic trading.

Over-the-Counter (OTC)

• Characteristics: For stocks not traded on major exchanges, often small-cap or delisted.
• Instruments Traded: Includes cryptocurrencies, foreign currencies, and certain derivatives.

Major US Exchanges

New York Stock Exchange (NYSE)

• Location: 11 Wall St., New York City.
• Largest Exchange: By securities traded value.
• Auction Market: Specialists present for trading specific stocks.
• Listing Requirements: Minimum income and market capitalization standards.

Nasdaq

• Operation: Communicates buyers/sellers via networked computers.
• Market Makers: Dealers ready to buy/sell stocks, post bid/ask prices.
• Listing Requirements: Revenue and market capitalization criteria.

Over-The-Counter (OTC)

• Nature: Lists small or delisted companies, not requiring SEC registration.
• Example: OTCBB closed in 2021, while OTC Market Group has its own criteria.

International Exchanges

• Shanghai Stock Exchange: Largest in mainland China.
• Euronext: Formed by merging exchanges in Amsterdam, Paris, Brussels.
• London Stock Exchange: Includes FTSE 100 Index.
• India: Surpassed Hong Kong as fourth-largest by market capitalization.

How To Invest in the Stock Market

1. Educate Yourself: Understand financial concepts, use resources like Investopedia.
2. Determine Investment Goals: Align strategy with goals (retirement, home purchase).
3. Assess Risk Tolerance: Balance risk with personal comfort and timeline.
4. Choose Investment Account: Open brokerage account, consider tax advantages.
5. Start with Low-Cost Index Funds: For diversification and lower fees.

Brokerage Houses

Full-Service Brokerages

• Services: Investment advice, financial planning, accounting.
• Fees: Higher, often a percentage of assets managed.

Discount Brokerages

• Focus: Lower fees, fewer services.
• Suitability: For those confident in managing their own investments.

Alternative Trading Systems

Dark Pools

• Nature: Private exchanges for large trades without public bid/ask.
• Advantages: Trade without impacting market price.
• Criticism: Lack of transparency and potential for unfair advantages.

Cryptocurrency Exchanges

• Coinbase: Largest U.S. exchange, for retail and institutional trading.
• Binance: Major global exchange with high trading volumes.

SEC Regulation

• Division of Trading and Markets: Ensures fair, orderly, efficient markets.

Additional Concepts

• Stock Exchange vs. Stock Market: Exchange is the infrastructure; the market is all stocks in a region.
• Derivative Exchanges: Dedicated exchanges like Cboe for derivative trading.

Conclusion

• Importance of Exchanges: Essential for capital raising and trading.
• Evolution: Transition from physical to electronic, enhancing efficiency.
• Understanding Exchanges: Vital for navigating the financial landscape.