A stock exchange is an organized, regulated marketplace where the shares of companies, and often bonds, exchange-traded funds and derivatives, are listed and traded under a common rulebook. The exchange sets standards for which companies may list, runs the trading system that matches buy and sell orders, publishes prices and supervises trading. Well-known examples include the New York Stock Exchange, Nasdaq, the London Stock Exchange, Japan Exchange Group, the Shanghai and Shenzhen exchanges, India's National Stock Exchange and BSE, and the Pakistan Stock Exchange.
The stock market is the broader idea: all the places and systems where shares are issued and traded, including exchanges, alternative trading venues, dark pools and dealer networks. It covers both the primary market, where companies sell new shares, and the much larger secondary market, where investors trade existing shares among themselves. A stock exchange is one of the financial market infrastructures that make the stock market work.
Stock exchange in plain terms
A stock exchange is like a well-run auction house that never closes for long. Sellers bring their items, buyers shout bids, and the auctioneer makes sure every sale happens at a fair, public price and that buyers actually pay and sellers actually deliver.
The stock market is the whole antiques trade around it: the big auction houses, smaller rooms, private dealers and online sites. Prices in all of them move together, because a buyer who sees a bargain in one place can sell it in another. When people say "the market fell today", they mean prices across this whole trade dropped.
History
Organized trading in shares began in Amsterdam after the Dutch East India Company issued tradable shares in 1602. In London, brokers traded in coffee houses such as Jonathan's, where price lists were published from 1698, and the London Stock Exchange was formally constituted in 1801. In New York, brokers signed the Buttonwood Agreement in 1792, the origin of the New York Stock Exchange. Nasdaq opened in 1971 as the first electronic stock market.
Exchanges were long run as members' clubs of brokers. From the 1990s most demutualized and became listed companies themselves, and trading floors gave way to electronic order books. Many countries merged regional exchanges: Pakistan combined the Karachi, Lahore and Islamabad exchanges into the Pakistan Stock Exchange on 11 January 2016.
How trading works
Investors place orders through a broker. On most modern exchanges these orders go into a central order book, which matches the highest bid with the lowest offer; a market order trades immediately at the best available price, while a limit order waits for a set price. A market maker may post continuous buy and sell quotes to keep trading smooth. A large share of volume now comes from algorithmic trading and high-frequency trading.
After a trade, a central counterparty steps between buyer and seller, and the trade is settled when cash and shares change hands. The United States moved to settlement one business day after the trade (T+1) on 28 May 2024, India completed its move to T+1 in January 2023, and the EU, the UK and Switzerland plan to move from T+2 to T+1 on 11 October 2027.
What stock markets do
- Raising capital. Companies sell shares through an initial public offering or later issues to fund growth.
- Liquidity. Investors can turn shares into cash quickly, which makes them more willing to invest in the first place.
- Price discovery. Continuous trading sets a public value for each company, summarized in its market capitalization.
- Signalling the economy. Indices such as the S&P 500, the Dow Jones Industrial Average and the KSE-100 track broad prices and are watched as a gauge of business confidence.
Whether prices are a reliable guide to value is debated. The efficient market hypothesis holds that prices quickly reflect available information, while critics point to repeated bubbles and crashes as evidence of herd behavior.
Regulation, cycles and crashes
Exchanges are overseen by national regulators: the SEC in the United States, the Financial Conduct Authority in the UK, ESMA and national authorities in the EU, SEBI in India and the SECP in Pakistan. Rules target insider trading, market manipulation and unfair access. Many exchanges are also a self-regulatory organization with powers over their members.
Stock markets move in long bull markets and sharp bear markets. Notable crashes include October 1929, which preceded the Great Depression; Black Monday on 19 October 1987, when the Dow fell about 22.6 percent in a day; the dot-com collapse of 2000 to 2002; the 2008 financial crisis; and the pandemic sell-off of March 2020. Since 1987 many exchanges use circuit breakers: in the United States, a fall in the S&P 500 of 7 or 13 percent from the previous close halts trading for 15 minutes if it happens before 3:25 p.m. New York time, and a 20 percent fall closes the market for the day.