Stock exchanges are among the most notable marketplaces and have a high impact on the global economy. Here’s a guide for crypto enthusiasts to better understand and get familiar with stock exchanges.
The stock market makes up a larger part of the global market as it provides the possibilities for companies to be accessible to investors all around the globe. However, just as crypto exchanges make up the crypto market, stock exchanges are also the essential tools that make up the stock market. Hence, it is important to understand what a stock exchange is all about.
Meanwhile, before getting to understand what exactly stock exchanges are all about, it would be more confusing for our readers if they are yet to know what stocks themselves mean. Stocks are valuables that represent ownership of a portion of a publicly listed company. Hence, owning part of the stocks of a company automatically makes the investor a shareholder in the company involved.
What is a Stock Exchange?
A stock exchange is a centralized platform that provides an avenue for stock traders from any part of the world to connect for the purpose of buying and selling financial instruments.
The financial instruments provided for trading on a stock exchange do not only include stocks. They extend to equities, commodities, and bonds. Shares are made publicly available through stock exchanges.
A notable key feature of a stock exchange is that it can either be auctioned based exchanges or electronic exchanges. Stock exchanges are somewhat comparable to crypto exchanges but they also differ from crypto exchanges in some major ways.
Unlike crypto exchanges, stock exchanges provide a physical means for buyers and sellers of stock to meet and communicate verbally to execute trades. As such, stock exchanges can either be physical or online platforms provided for investors and brokers to buy and sell shares of publicly traded stocks.
How Stock Exchanges Function
Stock exchanges operate in the form of marketplaces where companies that want to have their shares listed for trade can have their stocks listed for trade on their desired stock exchanges.
Stock exchanges in their exclusive functionalities help to facilitate an efficient and easy trading experience for buyers and sellers of stocks. This is so because stock exchanges enhance the provision of enough sellers and buyers for publicly listed stocks, thereby providing liquidity in the market.
Stock exchanges function in a way that protects the interest of investors and companies concerned. Being regulated, they ensure that trading occurs in an orderly and accurate manner to communicate adequate financial information to investors and financial professionals. Even stocks become safer with these exchanges as they reduce the risk of manipulations or fraudulent activities which could pose the members of the exchange at risk of financial losses.
The whole activities and operations of a stock exchange start with compulsory conduction of an initial public offering (IPO) by the company that desires to have its stock listed for trade. This requirement allows the company’s stock to be available for trade on an exchange.
The initial stage will see the company selling shares to an initial set of public shareholders in a primary market (IPO). The IPO would then extend the shares to the reach of public shareholders for trading on a stock exchange, which is the secondary market.
Types of Stock Exchanges
As said earlier, there are diverse types of stock exchanges. These exchanges often possess different modes of operation which is what distinguishes them. Let us discuss the different types of stock exchanges.
- Auction exchanges. Auction exchanges, or “open outcry systems”, are type exchanges that adopt a matching mechanism. They pair up intending buyers and sellers of stocks depending on the lowest price the seller is bidding and the highest price the buyer is willing to pay for the shares of stocks involved. Pairs with matching price bids can then proceed to execute their orders. It is a traditional stock exchange system that allows brokers and traders to communicate about the transaction proceedings physically and verbally. A perfect example of an auction exchange is the New York Stock Exchange (NYSE).
- Electronic exchanges. They merge investors and brokers online. They do not require the parties to meet physically before executing stock trades. It allows potential investors to connect with stock exchanges through the internet. This exchange allows investors from distanced regions to buy shares from a company with no distance barrier. Electronic exchanges have proven to be more convenient and faster. An example of an electronic exchange is NASDAQ.
- Electronic communication networks. These exchanges are also dubbed as alternative trading systems (ATS). They operate similarly to electronic exchanges. However, they directly connect buyers and sellers of stocks together. Hence, they allow investors to trade listed stocks and other exchange-traded products even outside normal trading periods. Examples of these exchanges are Nasdaq’s Interbank Network Electronic Transfer (INET), and E*Trade’s Instinet
- Over-the-Counter (OTC) Markets. These are local markets that feature small companies that offer cheap stocks. They trade their stocks outside the major and well-recognized stock exchanges. These companies are often regarded as unlisted stocks. They cannot afford to pay the charges required to have their stocks listed on major exchanges. Examples of over-the-counter markets are Over-the-Counter Bulletin Board (OTCBB) and Pink Sheets.
Digital Exchanges
Digital exchanges comprise exchange platforms that allow people to trade digital assets through the internet. This is an innovation that has made it easy for people to trade digital assets especially cryptocurrencies from any part of the world.
The world’s leading cryptocurrency exchange is Coinbase Inc (NASDAQ: COIN). The exchange has lots of cryptocurrencies listed on it. The exchange has gained popularity in almost all crypto-inclined countries of the world and has seen massive users from different parts of the world.
There are other cryptocurrencies exchanges that have made it to top ratings and are highly adopted by massive crypto users. These exchanges sometimes differ in their mode of operations and transaction levies. Some of the prominent cryptocurrency exchanges from around the world are Binance, Kraken, HuobiGlobal, and lots more.
Other Exchanges
There are lots of many other stock exchanges found all over the world just as there are lots and varieties of digital exchanges found all over the world.
Meanwhile, there are only a few notable and highly recognized stock exchanges that oversee the trade of stocks all over the globe. In Asia, the Tokyo Stock Exchange (TSE) has been rated as the largest stock exchange in the region by the volume of companies that have their stocks listed on it.
Moreso, Euronext has also been rated as the largest stock exchange in Europe. Euronext is recognized to have the most of companies hosted on it among other stock exchanges in the European region.
The Bottom Line
The existence of the stock market is not complete without a stock exchange. It provides an avenue for stock traders, connecting buyers and sellers of stocks and executing their transaction processes. Thus, it is correct to say that the need for stock exchanges in the affairs of global finance is inevitable.
Furthermore, companies that aspire to have their companies grow and develop better should have their stocks listed on stock exchanges. This exposes them to the outside world, helps them gain more popularity, and also poses them to extended financial limits.
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