If you want to buy and sell shares in a stock market then it helps to know about the stock exchange.

If you don’t know what a stock exchange is or why they are needed to trade shares then read on and watch the video below.

You will learn what a stock exchange is and how it differs from a stock market.

You will learn why we have stock exchanges and how they came into being.

Bizarrely, you will also learn what the London Stock Exchange (LSE) has in common with Starbucks!



Stock Exchange Vs Stock Market

Stock exchange and stock market are very similar terms, very similar concepts, but there is a slight difference.

A stock exchange is a mechanism or a system or method for swapping or doing the act of buying and selling our stocks and shares in the market.

Why Have A Stock Exchange?

Stock exchanges were born many years ago and brought about by traders who were shipping their goods overseas, wanting to get some security or insurance for the trade.

In those very early days, shipping was a very dangerous business, a very risky business.

Putting your goods on a boat and then letting it set sail, it could be weeks or months until it got over to the other side of the world and the trader therefore wanted some sort of method of making sure they didn’t lose all their stock.

So they would insure their stock.

For an insurer, that is a lot of money in one big sum so they would break that sum up into small pieces and issue those as smaller pieces, or bonds (IOUs) to investors.

So basically, this was a mechanism of getting a number of investors to put up money for a shipment.

It was many years later when a company wanted to do the same thing and get investors on board.

So it broke its company up into shares.

That’s how bonds and shares are slightly different.

It was back in 1760 when the first stock exchange was formed in the city of London in the UK.

In those days, these bonds for all these shipping trips and their transacting was typically done in a number of coffee houses in the city of London, would you believe?

It’s Starbucks, But Not As We Know It!

For shares, the focus was a particular coffee house known as Jonathon’s Coffee House.

London Stock Exchange

But it wasn’t until 1773 when Jonathon’s Coffee House was renamed as the London Stock Exchange and at the time it was the first example of a stock exchange in the world set up to trade company shares.

Although the London Stock Exchange is the first ever stock exchange in the world and therefore it is the oldest, it is no longer the biggest.

New York Stock Exchange

The biggest is the New York Stock Exchange formed at 11 Wall Street in New York in 1792.

Stock exchanges in those days were physical markets.

So in order to trade you had to be physically at the market.

However, with the advent of computers in the 20th century, nowadays it is computers that do the physical trading and exchanging.

NASDAQ and Electronic Trading

There is no need for people to be physically on the trading floor any more like they used to be in the early days.

In fact it was the NASDAQ in 1971 that was formed as the first ever fully computerized stock exchange.

So the NASDAQ didn’t need a location like the London Stock Exchange or the New York Stock Exchange.

The NASDAQ, right from its inception, was an electronic-only trading platform.

Indeed, in order to keep up with the NASDAQ, all these other stock exchanges I’ve mentioned already and many others in other countries around the world have needed to computerize.

The advantage of an electronic exchange, of course, over a physical stock exchange is that the dealers, the brokers, the market makers – the people who trade the shares in the market don’t physically need to be at a given site.

They can trade electronically and they can be remote from the physical place where it used to take place.

The other major advantage as an investor is that it is all done electronically and therefore it is a lot slicker, a lot quicker.

It is instant, pretty much instant, nowadays and you can see this information on-line and hence why there has been a massive growth in on-line brokers for buying and selling shares.

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