Understanding Stock Exchange and Its Different Types

Author: James Clark

Everything that you should know about the stock exchange and its many types

Most people think they have a general understanding of the stock exchange — a huge room filled with people in suits making bids, while there is a bell clanging. However, it’s far more nuanced than that image. In reality, stock exchanges are online or physical venues where investors will buy or sell shares of stocks that are publicly traded.

They exist in every global market and provide investors with access to businesses on the worldwide market. There are two main stock exchanges in the United States: The NASDAQ and the New York Stock Exchange (NYSE). We will look at how stock exchanges work and their different types right here.

How Do Stock Exchanges Work?

In general, stock exchanges are similar to auctions, where they allow investors to buy or sell shares of any stock. The share price will be determined through supply and demand, while the stock price will reflect on whether the traders think the company will perform well in the future.

Traders who think a company has a positive future will make bids to drive the price up, and those who don’t believe the company has good prospects will make bids to drive the price down. Buyers will be looking to get the best deals while sellers will try to sell their stocks for profit.

The Different Types of Stock Exchanges

Stock exchanges have several types that are determined by the actions taken by the traders and the company in the market. These include the following:

• Auction Markets

In auction markets, the buyers and sellers will be paired on the lowest price that sellers are accepting for their shares and the highest price the buyers want to pay. By matching these two figures, trades occur between the buyers and sellers. The buying and selling orders will be executed when the matching pairs are placed together.

An example of an auction market is the New York Stock Exchange, where the exchange pairs buyers and sellers to ensure there is an efficient process, and there are no direct negotiations taking place.

• Electronic Communication Networks (ECNs)

Electronic communication networks help investors make trades for exchange-traded products and listed stocks. They must have SEC registration to be classed as an alternative trading system (ATS). To place trades with the ECN, an investor must be a subscriber, and only institutional traders and broker-dealers can become subscribers.

If individual investors want to place an order, they need to have an account with a broker beforehand. An ECN system gives investors the chance to trade outside regular trading hours, especially when all the biggest stock exchanges aren’t open.

• Electronic Trading

E-trading or electronic trading is a common practice, as it allows individuals to connect to an ECN or stock exchanges through the internet. It gained popularity in the 90s and replaced phone trading and traditional floor trading. Electronic trading has substantial benefits compared to traditional trading, as you can do it remotely. There isn’t any need for brokers to be present physically at the stock exchange.

You can buy and sell stocks quickly, and it is cheaper than other forms of trading. The savings can also be passed to individual investors who don’t want to pay any fees while trading on the stock exchange.

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