A stock exchange is an institution where the shares of publicly traded companies listed on that particular exchange are bought and sold between members (or brokers) belonging to the exchange.
The biggest stock exchange in the world is the New York Stock Exchange (NYSE) which has a lot of the world’s largest publicly-traded companies such as Exxon, Proctor & Gamble and Johnson & Johnson.
How do stock exchanges work?
AT&T is another company listed on the NYSE. Brokers who trade on the NYSE will sell and buy shares of AT&T to each other, thereby setting a price for that stock which can change every time shares exchange hands. The brokers act on behalf of whoever is putting in the buy and sell orders via their own brokerages. These buy and sell orders could be coming from a mutual fund, pension fund, private investor etc.
At one time all trading was done on the trading floor between individual brokers but most trading is now done electronically.
Mutual funds and index funds are not traded on stock exchanges but their underlying investments (stocks) are.
Another well known stock exchange is the NASDAQ exchange – this exchange is smaller than the NYSE exchange and has a very high percentage of technology companies compared to other stock exchanges.
What is the difference between a stock index and a stock exchange?
Sometimes a stock index will be based on the stocks traded on an exchange and might have a similar name. For example, the NASDAQ Composite index is based on all the stocks traded on the NASDAQ exchange.
The Dow Jones Industrial Index is a very famous index which is based on some larger stocks on the NYSE. There is no Dow Jones stock exchange however.