In general and casual conversations about the financial market, the terms ‘stock market’ and ‘stock exchange’ are somewhat interchangeable. You’d be forgiven for thinking that the two always mean the same thing. But in reality, they don’t.
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If you are one of the many people who often confuse the two, here’s a useful guide to help you understand what each represents.
What’s the difference between a stock market and a stock exchange?
The stock market is a general term used to refer to the organised trading of stocks through physical stock exchanges, electronic platforms and the over-the-counter market.
A stock exchange, on the other hand, is a specific form of a stock market. It’s the entity that facilitates the trading of stocks by providing a structured environment and platform for companies to list shares and for buyers and sellers of these shares to come together. It also provides other services, such as systems to track prices and trading volumes of shares.
An exchange can be a physical place where traders meet to do business, or it can be virtual, such as an electronic platform.
How does a stock exchange work?
Stocks usually become available for trade on an exchange after a company conducts an initial public offering (IPO). Before a company can conduct an IPO and become listed on an exchange, it has to meet specific standards are set by a regulatory authority. In the UK, it’s the FCA.
Investors who want to buy or sell the shares of a company listed on an exchange commonly have to go through a broker who is licensed to trade on the exchange.
Here in the UK, we have quite a good number of online share dealing brokers through which you can buy and sell shares. To find the right broker for your investing needs, check out our comparison of the best share dealing accounts.
What is its purpose?
An exchange provides a convenient meeting place for buyers and sellers.
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As an organised market, it acts as the facilitator of the transfer of ownership of shares, reducing the risk for investors. It ensures fair dealings and safety of funds due to government control and regulation of exchanges.
Regulations over the amount and procedure of trading, for example, help to avoid the exploitation of ignorant investors. Therefore, a stock exchange, in a way, serves as a watchdog for investors, since members of the exchange have to operate in line with set rules and regulations.
An exchange also serves another crucial function, which is to help determine the prices of various shares that reflect their real worth. The regular dealings by investors and speculators, for instance, help iron out unjustified price fluctuations.
Which are the major stock exchanges in the world?
Most countries in the world have at least one major exchange.
Here are the top five exchanges in the world together with their respective market cap, according to Statista.
|Exchange||Country||Market cap in trillions US$|
|The New York Stock Exchange||USA||25.53|
|Japan Exchange Group||Japan||5.1|
|Shanghai Stock Exchange||China||4.67|
|Hong Kong Stock Exchange||China||4.23|
In total, there are 16 exchanges in the world with a market cap of over US$1 trillion. The UK’s London Stock Exchange is one of these top exchanges with a market cap of US$2.92 trillion.
Though the terms ‘stock market’ and ‘stock exchange’ have different meanings, the two are closely related. Without stock exchanges, companies that want to sell their stock to the public wouldn’t have any formal platform to do so. And without a stock market, exchanges would have no reason to exist.
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