Do You Understand the Differences Between the Stock Exchanges?
On May 17, 1792, two dozen stockbrokers and merchants sat under a buttonwood tree on Wall Street in New York City and signed what is probably the most important financial document in American history. The Buttonwood Agreement is recognized as the founding document of the New York Stock Exchange (NYSE).
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Known as the Big Board, the NYSE is the largest stock exchange in the world and the heart of Wall Street in Lower Manhattan’s Financial District but it’s not the only stock exchange by far.
What Are Stock Exchanges?
Don’t think of stock exchanges as stores for stocks and bonds. Stock exchanges themselves don’t sell anything. Think of them instead as being like farmers markets — places where lots and lots of different sellers gather so interested buyers can shop them all in one place.
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The sellers are publicly traded corporations that are “listed” on a given stock exchange — kind of like a merchant getting a stall in the hypothetical farmers market. The buyers are stockbrokers looking to purchase ownership shares of those companies for their client investors — people like you. Each exchange sets its own rules and listing standards, including things like the number of years a company has been in existence, its market capitalization, share price and the type of service or product it provides.
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What Are the Different Kinds of Exchanges?
There are four different kinds of stock exchanges:
Auction markets: Exchanges like the NYSE fit into this category, which pairs buyers and sellers based on the highest price the buyer will pay and the lowest price a seller will accept.
Electronic communication networks (ECNs): These subscriber-only exchanges are mostly closed to regular investors and serve only broker-dealers and certain institutional investors.
Electronic trading: Electronic trading became popular in the 1990s and has now replaced most in-person floor trading.
Over-the-counter (OTC) trading: Small companies that can’t get listed on the big exchanges often trade on OTC exchanges.
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How Many Exchanges Are There?
There used to be a nationwide network of bustling regional stock exchanges that operated in America’s financial hubs, including Philadelphia, Boston, Baltimore, Chicago, Cleveland, St. Louis, San Francisco, Los Angeles and beyond. They began to merge after World War II, and then the invention of the microchip eventually made a sprawling system of physical exchanges unnecessary.
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Today, the two big U.S. exchanges are the NYSE and Nasdaq composite, the latter of which was founded as the world’s first electronic stock exchange in 1971. They are two of fewer than 20 major exchanges in the whole world with greater than $1 trillion in market capitalization.
The top 10 stock exchanges in the world are:
NYSE (U.S.): $25.62 trillion
Nasdaq composite (U.S.): $19.51 trillion
Hong Kong Exchanges: $6.76 trillion
Shanghai Stock Exchange (China): $6.56 trillion
Japan Exchange Group: $6.54 trillion
Euronext (Europe): $5.08 trillion
Shenzhen Stock Exchange (China): $4.83 trillion
LSE Group (U.K. and Italy): $3.83 trillion
TMX Group (Canada): $2.62 trillion
National Stock Exchange of India: $2.56 trillion
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Can I Trade on Any Exchange I Want?
No matter its rules or listing standards, and no matter whether it maintains a physical location like the NYSE, all stock exchanges in the U.S. are governed by the rules and regulations laid out by the Securities and Exchange Commission (SEC). That federal oversight, however, does not extend to foreign exchanges.
Investors looking for international exposure can buy and sell shares in U.S.-traded foreign stocks, ETFs and mutual funds that are listed on American exchanges. Alibaba, the so-called Amazon of China, for example, trades on the NYSE under the ticker symbol BABA. Buying a share is the same as buying a share of Coca-Cola.
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Attempting to trade stocks on exchanges in other countries, on the other hand, is a much different story.
It may be possible for some brokers to buy shares of a foreign stock that trades only on a foreign stock exchange. But be warned, the SEC cautions that these companies rarely file reports with the SEC, their own reporting often contains information that’s different from what U.S. investors are used to, and they might not even be available in English.
The vast majority of modern American investors will live their whole lives without ever owning a stock or fund that wasn’t purchased through the Nasdaq composite or the NYSE.
This article is part of GOBankingRates’ ‘Economy Explained’ series to help readers navigate the complexities of our financial system.
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Last updated: June 29, 2021
This article originally appeared on GOBankingRates.com: Do You Understand the Differences Between the Stock Exchanges?