A stock exchange is a subset of the stock market where buyers and sellers meet to buy and sell shares of companies. A stock exchange acts as a marketplace where buyers connect to execute stock purchases.
A stock exchange’s main role is to provide liquidity, thus allowing buyers to buy stocks at their preferred market price. The exchange also makes it possible for stockholders to offload their holdings whenever and at whatever price the market dictates.
Exchanges also track the flow of orders that buyers make on each stock and try to balance the forces of supply and demand.
Five of the biggest stock exchanges in the world are
- NASDAQ stock exchange
- Dow Jones Industrial Average
- S&P 500
- Russell Global Index
NASDAQ Stock Exchange
It is the second-largest stock exchange in the world by market capitalization of stocks traded. The Nasdaq is often referred to as the Electronic Exchange as stock buyers and sellers are purely connected by computers over a network. Instead of buyers and sellers yelling the bid and ask prices of various stocks on a trading floor, traders carry out their trades over computer channels.
Any public company can list its stock on the NASDAQ, as long as it has a market capitalization of more than $1.1 million. The exchange is best known for technology stocks such as Amazon, Facebook, Google, and Apple. These are some of the most traded stocks by volume.
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is a market index that measures the performance of the 30 largest companies listed on various stock exchanges in the U.S. It is one of the oldest and one of the most followed indices as it follows and weighs the performances of 30 blue-chip companies in the U.S.
The DJIA is a price-weighted index, which means higher-priced stocks have more influence on the index’s overall reading than lower-priced stocks. One of the biggest drawbacks of the index is that it only includes 30 stocks, which means it sometimes doesn’t provide a fully accurate representation of the overall stock market’s more than 5,300 stocks.
Standard and Poor’s 500 is a stock market index just like the DJIA that measures the performances of 500 large companies listed in the U.S. It is one of the most followed stock indexes given its huge number of stocks, providing an accurate representation of the broader stock market.
The 500 large-cap stocks listed in the index account for about 80% of the total U.S. stock market capitalization.
For listing in the S&P 500, a stock must be a U.S company and have a market cap of more than $5.3 billion. Its public float must consist of at least 50% outstanding shares.
The Financial Times Stock Exchange is a share index of some of the biggest companies by market capitalization listed on the London Stock Exchange. The performance of the index is most of the time used to paint a picture of the UK’s broader stock market and businesses prosperity.
The FTSE 100 consists of the top 100 blue-chip stocks in the UK.
Russell Global Index
Russell Global Index is a global stock market index through which investors can track the performance of various market segments. For instance, investors can use mutual funds as well as exchange-traded funds based on the Russell Global Index to gain exposure to the broader U.S. stock market.
Investment managers also use indexes to measure their performance. Russell 2000 is one of the most popular indexes, as it tracks 2,000 small-cap U.S stocks.