What Is a Stock Exchange?

Function

The New York Stock Exchange
The economic purpose of a stock exchange is to bring businesses seeking capital together with investors who have money available. A corporation issues shares that give investors part ownership in the firm. By facilitating this capital flow, stock exchanges play a crucial role in fostering economic activity and growth. Stocks listed on exchanges are particularly attractive because the large market increases the liquidity (marketability) of the stock.

People buy stocks in other ways than by having a broker carry out an order on a stock exchange. Many companies (especially if they are new or very small) are traded "over the counter" with information provided by stock quotation services. New methods of trading stock have emerged such as online brokers and direct stock purchase plans in which an investor purchases stock directly from the issuing company. Stock exchanges remain the primary venue for trading stocks, however, due to their ability to handle a large volume of transactions and enforce standards that reassure investors.

The evolution of stock exchanges in the United States began in New York City in 1792 when traders signed the "Buttonwood Agreement" to trade securities on commission, starting with just five stocks and bonds. In 1815, these "curb traders" (trades were done outdoors until the 1830s) created a formal organization called the New York Stock & Exchange Board and imposed the first standards for listing stocks. The Exchange grew as America grew, introducing new features regularly, including the first stock ticker in 1867. Known as the New York Stock Exchange (NYSE), it is the largest stock exchange in the world---but by no means the only one. There are others in the United States, including the American Stock Exchange. Foreign stock exchanges include Tokyo, London and the Paris Bourse. By the early 1950s, over 6 million Americans owned stock, with most bought and sold on stock exchanges. Stock exchanges continue to grow and change with changes in toe global economy. In 2007, a merger of Euronext (a company operating European stock exchanges) and the NYSE created an international network of exchanges.

When you want to buy shares of stock in a company listed on a stock exchange, you start by opening an account with a broker. After studying different stocks and choosing one you wish to buy (or one to sell of those you may already own), call your broker and place the order. The broker relays your order to a "floor trader" working on the floor of the stock exchange where that stock is traded. It's the floor trader's job to match your buy order up with someone who has a sell order for that stock. The seller will have an asking price and the buyer will make a bid, or counter offer. Once a price is agreed on, the transaction is recorded and the results sent back to your broker, who notifies you that you own shares bought at the agreed on price (and charge you a fee for executing your order). There are numerous additional details. For example, a buyer or seller can specify a price or price range that is acceptable and the broker will only carry out the trade if those conditions are met.

In order to buy and sell stocks on a stock exchange, you must open a brokerage account. Brokerage firms usually require a $1,000 initial deposit to open an account. For people who are knowledgeable about the stocks they want to buy, a discount broker is usually best because they have lower fees. However, many people have an account with a full service broker or through their banks. Before investing in any stock, you should research the company. Go to the company's investor relations page on their website to read about the company's past and current performance. Order a copy of the company annual report and pay careful attention to their future plans and prospects (you can download the annual report in some cases). Find out how stable and effective the management is and how the stock has performed over the last few years. When you're ready, contact your broker to place a buy order. The key to successfully investing in stocks is to do your research, so make wise buying and selling decisions.