Ins and Outs of a Stock Exchange

Stock exchanges are an essential part of the stock market as it allows stock brokers and traders a centralized location to trade stocks and securities. On top of the record keeping activities that stock exchanges provide, the corporation will issue and redeem securities as well as handle capital events like dividends for all of the stock that’s listed on the exchange.

In the old days, everything was done by human intervention but as technology improved, most stock exchanges handle the majority of all transactions electronically.

It is important to note that stock exchanges merely facilitates the buying and selling of stock, because a transaction is ultimately between the buyer and the seller. The exchange itself is responsible for matching buyers and sellers, but do not have an incentive to change the prices up or down, which is ultimately determined by market forces (supply and demand).

Picking the Right Stock Exchange

For most corporations who wish to become a public company, the stock exchange to apply for is primary dependent on the principal business address.  For example, it is trivial to list in the London Stock Exchange if your company primary does business in London.

However, the listing requirements of each stock exchange may also affect the decision.  For example, US corporations have at least two choices (I’m listing them out with its requirements here):

  • New York Stock Exchange (NYSE) – In order to be listed in this exchange, the company must issue at least one million shares worth $100 million.  Also, the company must have earned at least $10 million in the last three years in order to qualify.
  • NASDAQ – A company that applies to be listed on NASDAQ must issue 1.25 million shares worth at least $75 million, and earn more than $11 million in the last three years.

Another determining factor relates to the herd mentality.  Since many technology companies list with NASDAQ, it plays a psychological effect for other technology firms to also list on the same exchange.

What Stock Exchanges Mean for Us

Most investors ignore the different stock exchanges unless the broker doesn’t allow trades on that particular exchange (a common restriction for international exchanges).  While stock exchanges perform a critical function in the stock market, the minor differences usually do not affect stock performances in any drastic way, which is the most important for investors.  Therefore, spend more time on the actual company instead of the exchange that it’s listed on unless you are trying to invest in the actual exchange via ETFs or index funds.

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{ 1 comment… read it below or add one }

john ping August 29, 2010 at 1:34 am

Stock exchanges are an essential part of the stock market as it allows stock brokers and traders a centralized location to trade stocks and securities.It is important to note that stock exchanges merely facilitates the buying and selling of stock, because a transaction is ultimately between the buyer and the seller.
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john ping
UK Stocks

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