Stock exchange
Family VII · Market & styles
Not to be confused with stock market.
Stock exchange is the organised venue on which already-issued shares and other listed securities change hands. It supplies the rulebook, the order-matching technology and the post-trade arrangements, while the companies themselves raise capital earlier, in the primary market. Membership, listing standards and settlement cycles differ between exchanges and jurisdictions.
What an exchange does
An exchange performs three distinct functions. It matches orders, either continuously through an electronic limit order book or periodically through a call auction. It lists issuers, admitting companies that satisfy disclosure and free-float criteria set by the exchange and the local regulator. It oversees trading, monitoring members for position limits, price manipulation and settlement failures.
Ownership varies: some exchanges are mutual organisations owned by their members, others are listed companies themselves, and some operate as for-profit venues competing with alternative trading systems.
Worked example: matching a trade
An order book shows the best resting orders in a stock. A market sell order arrives for 500 shares.
The sell order sweeps two price levels, so the execution price is the volume-weighted average rather than either quoted bid. Remaining size at 10.01 stays on the book.
Primary market and secondary market
An exchange trades securities that have already been issued. The issuer receives no proceeds from these secondary transactions; cash moves between buyers and sellers, less fees. New shares are sold in the primary market, often through an initial public offering, and only afterwards become eligible for exchange trading.
Often confused with
- stock market
- A stock market is the broad economic concept of trading in equities, including over-the-counter dealing and informal venues, whereas a stock exchange is a specific regulated institution with a rulebook and matching engine; the visible sign is that only the exchange has a named trading venue and a listing authority.