Stock exchange definition
/What is a Stock Exchange?
A stock exchange is an organized market in which securities are bought and sold. Securities are only traded on an exchange if issuers meet the reporting and financial stability requirements set by the exchange. A stock exchange can be used by issuers to sell new securities to investors, or by investors to trade existing securities amongst themselves. An essential benefit of a stock exchange is that it can reduce the liquidity risk associated with an investment, since investors can more easily sell off their investments through the exchange. A stock exchange may be physically located in one place, but is increasingly available through electronic communication networks.
Examples of Stock Exchanges
Examples of stock exchanges are the New York Stock Exchange, the NASDAQ, and the London Stock Exchange.
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Advantages of a Stock Exchange
There are several advantages to being listed on a stock exchange. First, it confers a certain level of prestige on a business, especially when the securities listing is on one of the major exchanges, such as the New York Stock Exchange. A second advantage is that it allows a business to more easily sell shares to investors, which gives it a ready source of cash. And finally, it is much easier for shareholders to sell their shares when they no longer want to possess an ownership interest in the business; this is a significant item, since it can be quite difficult to sell the shares of an unlisted business.
Disadvantages of a Stock Exchange
A stock exchange charges a periodic listing fee. This is not an inordinately large fee for a large, wealthy public company, but it can be burdensome for a smaller one. Therefore, a smaller firm might need to weigh this cost against the benefits of being listed, to see if it continues to make sense to do so. In addition, a smaller company might struggle to comply with the listing standards of a stock exchange, which include governance requirements. Again, it may be too expensive to continue to be in compliance with these requirements.