What is an Exchange?

Cheat Sheet:

  • An exchange is a marketplace.
  • The main goal is to maintain an orderly & regulated market.
  • When a company goes public, it means they are listed on an exchange.

Congratulations, you took a big step in investing and bought your very first stock! Now the question remains, where is that stock traded? You may have heard of the New York Stock Exchange or seen someone ring “the closing bell,” but you never really understood what that meant. Today, let us dive deep into exchanges.

An exchange, in the simplest terms, is a marketplace. Similar to how a farmer’s market sells different types of fruits and vegetables, different exchanges trade different types of stock. For instance, the NASDAQ exchange mainly trades tech stocks. The New York Stock Exchange, the largest stock exchange in the world, trades bigger companies like McDonald’s and Ford. The “opening bell” is wrung at 9:30am to begin trading and the “closing bell” is wrung at 4pm ET to mark the end of trading hours.

When a company is put up for their Initial Public Offering (or IPO) , it means that they are being listed on an exchange. The highly publicized IPO of Snapchat occurred recently. When they “went public,” Snap Inc. was listed on the New York Stock Exchange.

The reason why publicly traded stocks must be listed on an exchange is to help maintain a fair and orderly market. Sellers and buyers are connected through the exchange with the main goal of protecting investors. You don’t want to buy a stock for $50 while someone in Kentucky is paying $30! Exchanges used to be a physical place where brokers traded throughout the day. More and more, they are become electronic and in turn, more efficient.