What Is a Stock Exchange?

What Are Stock Exchanges?

A stock exchange is a regulated marketplace where investors buy and sell securities such as stocks and ETFs. Exchanges set the rules for which companies can list their shares, how trades are executed and how prices are reported. In the U.S., exchanges register with the Securities and Exchange Commission (SEC) and operate under its oversight.

Not every investment trades on an exchange, though. Here's a quick look at where common investment types are typically bought and sold:

How Stock Exchanges Work

Stock exchanges bring together buyers, sellers and market intermediaries under a common set of rules. Here are the key mechanics:

• Primary versus secondary markets: When a company first sells shares to the public through an initial public offering (IPO), that happens in the primary market. After that, investors trade those shares among themselves on the secondary market—which is what most people mean when they refer to "the stock market."
• Supply and demand pricing: Stock prices are driven by supply and demand. When more investors want to buy a stock than sell it, the price rises. When more want to sell, it falls.
• Bid, ask and spread: The bid is the highest price a buyer is willing to pay for a share. The ask is the lowest price a seller will accept. The spread is the difference between the two—and it represents the cost of the transaction.
• Listing standards and oversight: To have shares traded on an exchange, a company must meet specific requirements for stock price, market capitalization and financial reporting. U.S. exchanges register with the SEC, which sets broader market rules and enforces investor protections.
• Over-the-counter trading: Companies that don't meet exchange listing requirements can still have their shares traded through OTC markets, where transactions happen directly between dealers rather than on a formal exchange.

When you submit a buy order through your brokerage account, your broker routes it to a trading venue. There, a matching engine pairs your order with a corresponding sell order. Once matched, the trade executes and a confirmation appears in your account

Learn more: What Are Stocks and How Do They Work?

Types of Stock Exchanges

Stock exchanges aren't all structured the same way. Here's how the main types differ.

Auction Markets

An auction market matches buyers and sellers based on the highest price a buyer will pay and the lowest price a seller will accept. Trades happen between buyers and sellers directly, with no negotiation. The NYSE is an example of an auction market.

Dealer Markets

In a dealer market, dealers post the prices at which they'll buy and sell a particular stock, acting as market makers. Investors trade through dealers rather than directly with each other. Nasdaq is an example of a dealer market. Bonds, foreign currency and derivatives may also trade on dealer markets.

Alternative Trading Systems

An alternative trading system (ATS) functions similarly to exchanges but operates under lighter regulatory requirements. An ATS can trade both listed and unlisted securities, including penny stocks, bonds and other OTC securities.

Stocks traded through an ATS may not have the same level of financial transparency as those on traditional exchanges.

What Is a Stockbroker?

A stockbroker is a person or firm licensed to buy and sell securities on behalf of investors. Because most investors can't access exchanges directly, brokers act as intermediaries between you and the market. There are three main types:

• Direct market access brokers: These brokers give you direct access to an exchange's order book, which enables faster execution. This option suits active traders who manage their own research, but it tends to cost more than discount brokers.
• Discount brokers: These brokers aim to execute trades at the lowest possible cost, usually with no commission. Discount brokers, including most online brokerage platforms, are best suited for investors who want to research and trade independently.
• Full-service brokers: These brokers offer a comprehensive approach to investing, including personalized advice, portfolio management and financial planning services. They typically charge the most, but they also do the most legwork.

How to Buy Stocks on a Stock Exchange

Here are the general steps to buy stocks through an exchange:

1. Open a brokerage account: Choose a broker that fits your needs and open an account online. You'll typically need to provide basic personal and financial information to get started.
2. Fund your account: Transfer money from your bank account to your brokerage account. Many brokers allow you to start with no minimum deposit.
3. Research stocks: Review a company's financials, earnings history and industry position before buying. Most brokerage platforms provide research tools and analyst reports to help.
4. Place your order: Decide how many shares you want to buy and choose an order type. A market order executes at the current price; a limit order lets you set the maximum price you're willing to pay.
5. Monitor your portfolio: After buying, track your investments over time. Review your holdings periodically to make sure they still align with your goals.

Learn more: Do You Need a Broker to Buy Stocks?

Frequently Asked Questions

The Bottom Line

A stock exchange acts as a network where buyers and sellers of stocks, ETFs and other securities can meet to make trades. But while the inner workings of stock exchanges can be complex, buying and selling stocks can be as simple as talking to your financial advisor or submitting a stock order through your online brokerage account.

Regardless of how you approach your investment portfolio, it's important to take time to develop an investment strategy based on your current situation and your financial goals, then create a diversified portfolio based on that strategy.