What Is A Stock Exchange | A Primer

Those unfamiliar with the stock market often ask the basic question:  what is a stock Exchange?  The answer to what is a stock Exchange is more complicated than a simple definition.  A stock Exchange is a catch all-phrase that is used to describe what are actually a number of different stock exchanges throughout the United States and the world that includes everything from major stock Exchanges, such as the New York Stock Exchange (NYSE), to lesser known regional stock exchanges, such as the Pacific Stock Exchange (PSE), to stock Exchanges throughout the developed and developing world, such as the London Stock Exchange (LSE) and the National Stock Exchange of India.

Essentially, the answer to the question what is a stock exchange is that it is a platform on which companies that have met specific qualifications can sell their stock to raise capital for their business needs, by selling shares in their companies to the public, which thereafter can be publicly bought and sold on the stock exchange.  Meeting the qualifications to trade on a stock exchange is known in stock exchange parlance as being a ”listed stock”.  Being listed on a stock exchange provides a stock a certain degree of legitimacy in the world of investing, since the companies that list their stocks on stock exchanges have met stringent stock listing requirements that include having up to date filings with government regulators and having a large enough exchange cap to qualify to listing.

What Is A Stock Exchange | An Important Distinction

Those looking for an answer to the question “what is a stock exchange” should not confuse a stock exchange with stock quotation systems that have few requirements for stocks that they quote.  Stock quotations systems include stock trading platforms, such as the Over The Counter Bulletin Board (OTC:  BB) and the Pink Sheets.  Stock quotations systems are not stock exchanges by the strict definition of the word.  They are just venues that allow stock purchase and sell orders to be advertised to other prospective stock buyers or sellers.

The most important distinction between a stock exchange and a stock quotation system is that stock quotation systems do not have stringent listing requirements for the stocks that they quote, and therefore those who buy stocks that are quoted on stock quotation systems must be more cautious when making a purchase of such stocks.  Of course, stocks quoted on stock exchanges can also experience financial difficulties and steep stock declines, so caution and investment diversification is also warranted when investing in stocks listed on stock exchanges.

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