How the Stock Exchange Works | Investing for Beginners

Posted by Matin Varshochi in InvestingJanuary 14, 2022(Last Updated July 26, 2022)3 min read
Key Takeaways
  • The stock exchange is a part of a company’s ticker symbol, indicating which exchange the company is traded on.
  • A stock exchange aims to group companies and investors, where the companies receive funding for their expansion, and investors look for opportunities to increase their portfolio’s value.
  • The NYSE and NASDAQ are only two exchanges in a pool of many more; below is a list of the different types of exchanges and how they operate. 

 

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One of the first things you will notice when investing is a company’s ticker. The ticker symbol is a unique combination of letters used to classify different companies traded in the United States stock market. The first part of the ticker symbol typically states either “NYSE” or “NASDAQ.” In addition, the first part of the ticker symbol indicates what platform the stocks and bonds are traded on, which is essential to know.

 

Image Credit: f1 1photo // Shutterstock.com

 

Purpose of the Stock Exchange

 

The stock exchanges provide a trading platform between buyers and sellers to help them construct a deal in real-time to exchange commodities. Typically, companies look to the stock market when they wish to increase their market capitalization through an initial public offering (IPO), where they offer many million shares to the public. 

 

Different Types of Exchanges

 

Although stock exchanges are the most notable and famous types of exchanges, many different exchanges exist. Below are a couple of exchanges that are used daily.

 

Auction Market

 

The first type of exchange is an auction market, which allows a transaction to occur once the buyer and seller have reached an agreed-upon price. The best way to think of an auction is to imagine shopping at a grocery store, where if the price of a good matches the price you are willing to pay, that is when a transaction occurs. Otherwise, if the selling price and price you wish to purchase the item do not coincide, no transaction occurs.

 

This same principle applies in an auction market as investors only invest in listed companies if the stock price matches the price they wish to invest at. The largest stock exchange, the New York Stock Exchange (NYSE), which Intercontinental Exchange owns, is an example of an auction market. 

 

Electronic Communication Networks

 

Typically, stock exchanges operate from 9:30 a.m. to 4 p.m., and all orders must be put in prior to the market closing to ensure it goes through. However, sometimes, orders need to be placed after trading hours, when electronic communication networks become helpful. 

 

Electronic communication networks allow brokers to sign up for an account via the Securities and Exchange Commission (SEC), giving them the ability to put in a request after trading hours.  

 

Electronic Trading

 

The third type of exchange, also the most popular in modern society, is electronic trading. Electronic trading gives those who wish to buy and sell on the stock market the opportunity to do so remotely from their phone or computer. 

 

Before electronic trading was viewed as a way to invest in the stock market, people had to use brokers whenever they wished to make a transaction. However, using brokers was a tedious and lengthy process, making it difficult for people to purchase or sell items at the current price a company was trading at. 

 

With the implementation of electronic trading, everything was at the investor’s fingertips, and transactions could be made in a split second. Furthermore, the investor did not need to pay brokerage fees for every transaction. 

 

Over the Counter (OTC)

 

Lastly, over-the-counter (OTC) is a type of exchange used for companies not listed on the usual stock exchanges. The companies listed on these exchanges must pay fees to remain on them. However, as some smaller companies may not have the financial capability to pay these fees, they are unlisted and traded on lesser-known markets. 

 

Although stock exchanges may seem cut and dry on the outside, there is a layer of complexity underneath, as there are many different types of exchanges, not just the NYSE and NASDAQ that most people know. It is essential to know the different types of exchanges as lesser-known exchanges could be more suitable for your type of investing. 

 

Do you understand how and why publicly held companies are listed on different stock exchanges? Please share your thoughts with us in the comment section below.

 

Main Image Credit: orhan akkrut // Shutterstock.com

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