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Stock Market & Stock Exchange – Defined

A stock market, or a stock exchange, is a place where equities and securities in publicly traded companies are exchanged between investors.  Both stock market and stock exchange represent the same things and the two phrases are interchangeable.  Investors “meet” on the exchanges and trade stocks, bonds, securities, and even futures or commodities on these exchanges.  By rules, all transactions must occur within the open market and are not permitted to be exchanged outside of the market system.  This is to ensure the integrity of the exchange as well as to allot all market participants the ability to participate in any transaction.

However, it must be noted that an investor is not necessarily limited to buying or selling a specific security of a respective company on an exchange.  An investor may be able to contact a company directly and buy or sell their respective security through the company Investor Relations department, via the company Treasurer.  This is called a Direct Public Offering, or DPO.

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Types of Stock Exchanges

There are basically two types of exchanges, whether they be for commodities, futures, stocks, bonds, or any other type of security. They are:

  • Open Outcry
  • Electronic

Open Outcry Exchanges

In the past, prior to the implementation of computerized trading, all exchanges were a physical location that had an area where traders or dealers met and exchanged securities.  These dealers offered services to outside brokerage firms for individual market participants.

For anyone to exchange any kind of security or financial instrument, this individual would need an relationship with a brokerage, which would send any orders to the respective floor to place the order for trade.

This was conducted by floor dealers who would offer or bid on a security in the hope to buy or sell that security on a specified price.  The dealer making the bid or offer would call out the amount of securities needing to be exchanged.  Then, the dealer would hear calls, or outcries by other dealers looking to fulfill their own orders.

Electronic Trading

Today, many stock exchanges that used to be open outcry are now electronic and orders are filled via computer transactions.

However, and notoriously, the New York Stock Exchange (NYSE), or the main exchange that is referred to as “Wall Street”, is still open outcry with order flow being assisted via floor dealers and electronic computers. The reason for this is that the NYSE is owned by the individuals that own seats on the floor.

If the NYSE were to move entirely to electronic trading, such as the Nasdaq, the owners of these seats would effectively be unemployed.

What is Wall Street

Regardless of the method of type of transaction, the notion of Wall Street is any exchange that would be the in New York and where financial transactions of securities are conducted.

Wall Street itself is an actual street in Manhattan, New York.  The Exchange is considered America’s center of financial power.  Both the Nasdaq and NYSE, despite being different exchanges, are considered part of Wall Street.  However, the NYSE is an actual place that has a physical address on Wall Street.

Nasdaq, being fully computerized, is exactly that: A computer system and has no physical address.

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