stock exchange

Definition

An exchange on which shares of stock and common stock equivalents are bought
and sold. Organized and regulated financial market where securities (bonds, notes,
shares) are bought and sold at prices governed by the forces of demand and supply.
Stock exchanges basically serve as (1) primary markets where corporations,
governments, municipalities, and other incorporated bodies can raise capital by
channeling savings of the investors into productive ventures; and (2) secondary
markets where investors can sell their securities to other investors for cash, thus
reducing the risk of investment and maintaining liquidity in the system. Stock
exchanges impose stringent rules, listing requirements, and statutory requirements
that are binding on all listed and trading parties. Trades in the older exchanges are
conducted on the floor (called the 'trading floor') of the exchange itself, by shouting
orders and instructions (called open outcry system). On modern exchanges, trades
are conducted over telephone or online. Almost all exchanges are 'auction
exchanges' where buyers enter competitive bids and sellers enter competitive orders
through a trading day. Some European exchanges, however, use 'periodic auction'
method in which round-robin calls are made once a trading day. The first stock
exchange was opened in Amsterdam in 1602; the three largest exchanges in the
world are (in the descending order) New York Stock Exchange (NYSE), London
Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE). Called also stock
market. See also exchange.