how is the stock exchange

A practical, beginner‑friendly explanation of how is the stock exchange — what it is, who participates, how trading, listing, regulation and settlement work, and how retail investors can access mar...

2025-11-04 16:00:00

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Introduction

If you want to know how is the stock exchange, this article explains the institution, its main purposes, and how modern exchanges operate to match buyers and sellers, enable capital raising and support price discovery. You will learn the roles of issuers, investors, brokers, market makers, clearinghouses, trading mechanics (orders, auctions and matching engines), regulation, market hours, and practical steps for individual access. The guide stays factual and beginner‑friendly and highlights recent developments in market infrastructure as of early 2026.

Overview

A stock exchange is an organized market where securities such as shares of publicly listed companies are bought and sold under a common set of rules. When people ask how is the stock exchange different from the stock market, the distinction is that an exchange is a specific venue or system (an institution or electronic platform), while the term "stock market" describes the wider ecosystem of exchanges, over‑the‑counter trading, indices and participants that together form capital markets.

Primary functions of an exchange include:

Providing liquidity so buyers and sellers can trade quickly and at transparent prices.
Enabling price discovery by aggregating supply and demand into observable bid and ask prices and transaction records.
Facilitating capital raising when companies list shares through an initial public offering (IPO) or follow‑on offerings.
Supporting market integrity through rules, supervision and coordinated clearing and settlement.

Authorities such as the U.S. Securities and Exchange Commission (SEC) describe exchanges as central pillars of modern finance because they standardize trading, disclosure and investor protections.

Brief history

Trading organized securities began centuries ago with merchant exchanges and early bourses in Europe. Key milestones that led to modern stock exchanges include:

17th–18th centuries: Early bourses and company share trading (e.g., Dutch East India Company) established the practice of public ownership and transferable shares.
19th century: Formal exchanges with membership rules emerged in major cities, offering fixed locations for auction‑style trading.
20th century: Advances in communications and regulation professionalized listing standards, reporting requirements and clearing systems.
Late 20th–early 21st century: Electronic trading and networked matching engines replaced many floor‑based operations, increasing speed and capacity.

Today’s exchanges combine regulatory oversight, electronic infrastructure and specialized market participants to run continuous, high‑volume markets that support global capital formation.

Types of exchanges and trading venues

Exchanges and trading venues vary by structure and technology. Common models are:

Centralized physical exchanges: Historically, trading occurred on physical floors where specialists matched buy and sell interests. The New York Stock Exchange (NYSE) retains a hybrid model with designated market makers and a trading floor for some functions.
Electronic exchanges: Fully electronic venues match orders with high‑performance matching engines and rely on market makers and electronic liquidity. Nasdaq is a leading example of an electronic exchange model.
Over‑the‑counter (OTC) markets: Securities that do not meet exchange listing requirements trade OTC through dealer networks and quotation systems. OTC trading can include smaller equities and certain bond or derivative markets.
Alternative trading systems (ATS) and dark pools: These off‑exchange venues offer execution with varying degrees of pre‑trade transparency and can serve institutional needs for large block trades.

Market models include auction markets (orders meet in a centralized book where highest bids and lowest offers match) and dealer markets (dealers post prices and buy/sell from their inventory). Exchanges often blend features: they host central limit order books (auction) while also accommodating market makers (dealer functions) to enhance liquidity.

Key participants

Understanding how is the stock exchange used requires knowing who takes part and what roles they play.

Issuers and listed companies

Companies list on an exchange to raise capital by selling shares to the public. Listing benefits include wider investor access, increased visibility, and formal governance and disclosure obligations. Exchanges set listing requirements — minimum market capitalization, financial history, shareholder counts and corporate governance standards — to protect investors and maintain market quality.

Investors and traders

Investors range from retail individuals making long‑term investments to institutional investors (mutual funds, pension funds, hedge funds) that trade large volumes. Objectives differ: retail users may seek long‑term returns or income, while institutional investors often manage portfolios against benchmarks or execute short‑term strategies.

Brokers and broker‑dealers

Brokers act as intermediaries between investors and exchanges. Retail customers place orders through a brokerage account; the broker routes those orders to an exchange, market maker or alternative venue. Broker‑dealers may also trade for their own accounts, provide research and custody services, and execute client orders through smart order routers that seek best execution across venues.

Market makers, designated market makers, and liquidity providers

Market makers continuously post bid and ask quotes to facilitate trading and narrow spreads between buys and sells. On some exchanges, a designated market maker (DMM) has special responsibilities to maintain orderly markets for assigned securities. For example, a DMM on hybrid exchanges may support opening and closing auctions and supply liquidity during stress periods. On electronic exchanges, competitive market makers and algorithmic liquidity providers perform these functions.

Exchanges, clearinghouses and settlement agents

Exchanges match orders and maintain market infrastructure, but clearinghouses (central counterparties, or CCPs) step in afterward to guarantee trades by becoming the buyer to every seller and seller to every buyer. Settlement agents and national central securities depositories handle the final exchange of securities and cash, completing the settlement cycle (e.g., T+1 in many major markets as of 2026). Clearing and settlement reduce counterparty risk and are supervised by regulators.

How trading works

Order types and order routing

Common order types include:

Market order: execute immediately at the best available price; prioritizes speed over price certainty.
Limit order: instructs an exchange to execute at a specified price or better; prioritizes price certainty.
Stop order (stop‑loss / stop‑limit): becomes a market or limit order once a trigger price is reached.
Midpoint and pegged orders: used to target execution at the midpoint between best bid and ask or relative to a reference price.

When a retail investor submits an order, the broker uses order routing logic to find the venue likely to produce the best execution, considering price, speed and fees. Routing may send orders to exchange order books, market makers, or block‑trading venues depending on order size and strategy.

Price formation and matching engines

Exchanges use matching engines that pair compatible buy and sell orders. Key concepts:

Bid and ask: the highest price buyers will pay and the lowest price sellers will accept.
Spread: the difference between ask and bid, a fundamental liquidity metric.
Order book: an electronic ledger displaying queued limit orders across price levels.
Continuous trading vs. auctions: most securities trade continuously during market hours; exchanges also run opening and closing auctions where large aggregated order flows establish reference prices.

Matching algorithms prioritize price and time: better prices execute first; if prices match, earlier orders take precedence.

Market microstructure concepts

Market microstructure studies how trading mechanisms affect prices and liquidity. Important concepts:

Depth: the volume available at or near the best bid and ask.
Liquidity: how easily a security can be traded without moving its price substantially.
Volatility: the degree of price variation over time, influenced by information flow and trading strategies.
Short selling and borrowing mechanisms: traders may sell securities they do not own by borrowing shares, affecting supply and short interest.

Together, these mechanics explain short‑term price behavior and execution quality for different participants.

Listing and delisting

Exchanges require listed companies to meet initial and ongoing standards. Common listing steps include:

Meeting eligibility: thresholds for market cap, revenue, shareholder count and corporate governance.
Filing required disclosure documents (e.g., registration statements and prospectuses) with the regulator.
Undergoing listing review and approval by the exchange.

Delisting can happen voluntarily (company chooses to go private or move to another venue) or involuntarily for failing to meet rules (e.g., prolonged share price below a threshold, missed filings or insolvency). Exchanges and regulators publish delisting procedures that provide notice and, where possible, allow corrective actions.

Market hours, pre/post‑market trading and trading sessions

Standard trading hours (for U.S. equities) typically run from 9:30 a.m. to 4:00 p.m. Eastern Time. Many exchanges also facilitate extended sessions:

Pre‑market trading: early trading before the official open, often with lower liquidity and wider spreads.
After‑hours trading: extended trading after official close, likewise with reduced liquidity and potential for greater price gaps.

Opening and closing auctions aggregate orders to determine reference prices; these periods can concentrate volatility and execution opportunity. Retail investors should be aware that pre/post‑market prices may not reflect regular session liquidity and execution certainty.

Regulation, oversight and market integrity

Regulatory authorities, like the SEC in the United States, oversee exchanges to ensure fair, orderly and efficient markets. Key regulatory functions include:

Rule‑making for exchanges and market participants, including listing standards and reporting obligations.
Surveillance systems to detect market manipulation, insider trading and abusive practices.
Enforcement actions against misconduct, coordinated with criminal authorities when appropriate.

As of early 2026, regulatory discussions include questions about enforcement remedies, such as whether disgorgement (returning ill‑gotten gains) requires demonstrable investor harm. For example, the U.S. Supreme Court agreed to decide an SEC disgorgement case scheduled for argument in 2026, reflecting ongoing legal debate about enforcement scope.

Disclosure requirements mandate public companies deliver timely, accurate financial reporting and material event disclosure so investors can make informed decisions. Investor education offices (e.g., SEC Investor.gov) provide guidance for retail participants.

Technology and modern developments

Technology drives structural change in exchanges and market plumbing.

Electronic trading, algorithmic and high‑frequency trading

Automation and algorithmic strategies have increased execution speed and complexity. Algorithmic trading can improve liquidity provisioning and price efficiency, but high‑frequency trading (HFT) has raised debates about fairness, market impact and the potential for instability in low‑liquidity environments.

Data feeds, co‑location and latency

Market data feeds distribute real‑time prices and order book updates. Firms that wish to reduce latency often co‑locate servers near exchange matching engines and pay for premium data feeds. These practices can confer speed advantages for certain strategies and have led regulators to focus on market access fairness and best execution obligations.

Exchange innovations (ETFs, alternative trading systems, tokenization)

Exchange‑traded funds (ETFs) grew into a major class of listed products, providing diversified exposure and high liquidity. Alternative trading systems expanded execution choices for large institutional trades. In infrastructure innovation, tokenization and settlement on blockchain rails are gaining institutional pilots and adoption.

As of January 2026, BNY Mellon announced tokenized deposit services with institutional users, and major infrastructure firms are testing tokenized settlement rails. These developments suggest potential for more continuous settlement and programmable transactions in the future. As of January 2026, Bloomberg reported that BNY Mellon had moved deposits onto blockchain rails and that several institutional partners were trialing the system.

Measures, indices and market benchmarks

Market indices summarize performance across selected securities and serve as benchmarks for portfolio managers and passive investment products. Common indices include:

S&P 500: market‑cap weighted index of large U.S. companies.
Dow Jones Industrial Average: price‑weighted index of prominent industrial firms.
Nasdaq Composite: broad index heavy in technology and growth companies.

Indices have different constructions (price‑weighted, market‑cap weighted, equal‑weighted) that affect how individual stock moves influence the index. Indices also serve as underlying references for index funds and ETFs.

Economic role and benefits

Stock exchanges are central to modern economies because they:

Channel savings into productive investment by enabling companies to raise capital.
Support corporate governance by subjecting firms to public reporting and shareholder scrutiny.
Provide price signals that help allocate resources across sectors and companies.
Offer liquidity that allows investors to diversify and manage risk.

Healthy exchange functioning reduces the cost of capital and supports long‑term economic growth.

Risks and market behavior

Exchanges and their participants face multiple risks:

Market volatility and sudden price swings that can erode portfolio value.
Liquidity crises where market depth evaporates and spreads widen significantly.
Systemic risk if clearinghouses, major broker‑dealers or infrastructure providers face stress.
Operational risks from outages, cyberattacks or data feed failures.

Events like flash crashes demonstrate how rapid automated trading and thin liquidity can cause abrupt price dislocations. Exchanges and regulators implement circuit breakers, order throttles and surveillance to mitigate these risks.

How individuals access the stock exchange

Retail investors access exchanges through brokerage accounts. Steps typically include:

Choose a broker: evaluate fees, execution quality, available markets and tools. Many retail platforms offer mobile and web access, research, order types and customer support.
Open and fund an account: provide identification and bank details, then deposit funds to trade.
Place orders: use market or limit orders depending on execution preference and risk tolerance.
Monitor positions and stay informed: follow company filings, earnings reports and market news.

When comparing brokers, consider trade commissions or spread arrangements, account fees, margin rates, and the broker’s stated best execution practices. For custody and wallet services related to tokenized securities or digital assets, platforms such as Bitget provide integrated solutions including a trading venue and a custody wallet; readers are encouraged to review provider disclosures and regulatory status before transacting.

Comparison with cryptocurrency exchanges (brief)

Traditional stock exchanges and cryptocurrency exchanges share functional similarities (matching buyers and sellers, order books, and custodial needs), but key differences include:

Regulation and supervision: securities exchanges are subject to established securities laws and regulator oversight (e.g., SEC), whereas crypto platforms operate in a more varied regulatory landscape.
Settlement and custody: equities settle through regulated clearinghouses and central depositories; many crypto platforms and custody solutions use blockchain settlement and on‑chain custody models.
Products and market hours: crypto markets often operate 24/7; public equity markets have fixed trading sessions with regulated settlement cycles.

These contrasts affect investor protections, product design and operational risk profiles.

Major global examples

New York Stock Exchange (NYSE)

The NYSE combines a centralized listing prestige and a hybrid trading model where designated market makers support liquidity and opening/closing auctions. The exchange is known for serving large, well‑capitalized companies and for stringent listing standards.

Nasdaq

Nasdaq operates as an electronic exchange reliant on competing market makers to supply liquidity. It is associated with technology and growth companies and with a fully electronic, networked matching architecture.

Other notable exchanges

Major global venues include the London Stock Exchange, Tokyo Stock Exchange and regional or specialized exchanges. Over‑the‑counter markets complement exchanges for smaller and less liquid securities.

Current market indicators and how to read them (practical guide)

To interpret market health:

Indices: watch headline indices (S&P 500, Nasdaq Composite) for broad market direction.
Volume: rising volume with price moves indicates conviction; low volume can signal weak breadth.
Advance/decline data: the number of stocks rising vs. falling shows market breadth beyond headline indices.
Volatility indices: measures like the VIX (in the U.S.) signal expected near‑term volatility.

For real‑time status consult licensed market data vendors and recognized financial news providers. As of January 8, 2026, for instance, crypto.news reported that Coinbase’s stock price had fallen roughly 50% from its 2025 high and that Wall Street analysts had mixed views on near‑term direction; this illustrates how single‑stock moves can reflect product mix, regulation, and market sentiment rather than broad market trends.

Practical tips and next steps

If you are beginning to engage with the market, consider these practical actions:

Learn basic order types and practice with small positions to understand execution differences between market and limit orders.
Compare broker execution quality, fee schedules and customer support.
Read issuer filings (annual reports, 10‑Ks and quarterly reports) to understand company fundamentals before investing.
Use reputable educational resources (SEC Investor.gov, exchange investor education centers) for guidance.

If you are exploring digital custody or tokenized instruments, evaluate custody security, regulatory status and audit disclosures. For integrated crypto and token services, Bitget and Bitget Wallet offer combined exchange and custody tools—review provider documentation and compliance statements before use.

Recent industry context (as of early 2026)

As of January 8, 2026, according to crypto.news, Coinbase’s stock price had declined roughly 50% from its 2025 peak. Analysts at major banks issued upgrades and varied price targets in early January 2026, while technical indicators reflected downside pressure at that time. This example shows how individual companies listed on exchanges can experience high volatility based on product launches, market share dynamics and macro trends.
As of January 2026, Bloomberg reported that BNY Mellon had launched tokenized deposit services and that major institutional participants were trialing blockchain rails for settlement. These developments indicate ongoing infrastructure modernizations that may influence how exchanges and clearinghouses operate in future trading and settlement models.

All date and fact references above are based on published reporting from the cited outlets as of the dates noted; readers should check primary sources and exchanges/regulators for the latest, verifiable updates.

More resources and tools are available from official regulators (SEC), major exchange educational pages (NYSE, Nasdaq), and market education outlets (Investopedia, Vanguard). For those exploring integrated trading and custody for both traditional securities and tokenized assets, consider reviewing Bitget’s platform offerings and Bitget Wallet for custody solutions; always confirm regulatory status and risk disclosures before transacting.

Explore further guidance or platform features to match your needs and continue learning about how is the stock exchange and how market infrastructure evolves over time.

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