What Is a Stock Exchange and How Does It Work?


Let’s say you want to sell your old DVD player. The average cost of a DVD player these days is $20, so you decide to put it on Craigslist for $20.

Eventually, someone emails you and wants to buy your DVD player for $20. They say they’ll meet you at your nearest coffee shop. When you arrive there, they send you another email asking you to meet in a nearby park. When you finally meet them at the park, they say they’ll still buy the DVD player, but they want to pay $15.

You tell them that’s unacceptable. That’s when they sucker punch you and take your DVD player by force.

This wouldn’t have happened if there was a neutral party overseeing the transaction. Since the price of a DVD player is $20, they would have made sure the buyer pays exactly $20 and the seller gives the buyer their DVD player without incident.

This is what a stock exchange does. Investors can’t make up prices or values on a whim; they have to be determined and accounted for in a safe place, and an exchange does all that…and more.

An exchange (or stock exchange) is a physical place or an online space where stocks and other securites are bought and sold (or “traded.”)

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Flickr/gabriele82

Stocks are sold for money on an exchange. The buyer pays money and receives a share (or shares) of stock, and the seller gives up their stock and receives money.

Exchanges exist to create tight rules and restrictions that ensure all transactions go smoothly and are fair to all participating parties.

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They also keep updated price information on all stocks and securities.

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If there’s one central place that shows the correct, updated pricing, then no one gets swindled!

There are many stock exchanges around the world.

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Flickr/Divya Thakur

The biggest stock exchanges are the New York Stock Exchange, NASDAQ, London Stock Exchange, and Tokyo Stock Exchange. These four exchanges have a market capitalization — or total price of all combined shares of stock — of over trillions of dollars each.

Certain companies trade exclusively on specific stock exchanges. Other companies have multiple stocks trading on multiple exchanges.

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For example, Facebook ($FB) trades on the NASDAQ stock exchange. Exxon Mobil ($XOM) trades on the New York Stock Exchange. Samsung ($SSNLF) trades on multiple exchanges, including the Over-the-Counter Market Exchange in the U.S. and the Korea Exchange.

You (yes, you!) can buy any stock listed on pretty much any stock exchange.

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If a company is publicly listed on a stock exchange and they have shares available, you can buy those shares through a broker or brokerage. Mutual funds are also listed on stock exchanges, but are only open to certain people involved in their funds.


Without stock exchanges, you would have to calculate the exact value of a stock, while also making sure you’re not getting ripped off by the person you’re buying stock from. Since exchanges easily facilitate the buying and selling of stocks, they help investors complete transactions safely and with all records of sales and purchases. This way, everyone goes home happy and no one gets swindled.

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