Points to know
- Buyers and sellers meet to trade stocks through an exchange.
- Exchanges can be physical or electronic.
- Stocks that can't meet exchange requirements may be traded "over the counter."
How to invest
Stock exchanges
"NYSE" and "Nasdaq" get thrown around a lot in the financial media. What roles do they play in the markets?
4 minute read
A trading post for stocks
A stock exchange is simply a marketplace where traders buy and sell stocks. (Some other types of investments—like exchange-traded funds (ETFs) and notes (ETNs)—are also traded on stock exchanges.)
Some exchanges have physical locations—for example, the New York Stock Exchange (NYSE) located on Wall Street in Manhattan. But some exchanges are completely electronic, like the Nasdaq Stock Market.
Countries and regions around the world have their own exchanges, like the Tokyo Stock Exchange.
Stocks can be "listed"—offered for trading—on one stock exchange or on multiple exchanges.
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Stock
Usually refers to common stock, which is an investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.
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ETF (exchange-traded fund)
A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.
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Capitalization
The total value of a company's stock that is available to be traded.
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American depositary receipt
A certificate issued by a U.S. bank that represents one or more shares in a foreign stock. ADRs are denominated in U.S. dollars and traded on U.S. exchanges and hence can be a cheaper and easier way to invest in individual international stocks.
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Liquidity
A measure of how quickly and easily an investment can be sold at a fair price and converted to cash.
How exchanges work
On a physical exchange like the NYSE, "market makers" who specialize in a particular stock will buy and sell that stock to brokers. The trading floor functions like an auction house, with bid and offer prices changing throughout the trading day.
In the U.S. stock market, trading sessions are held Monday through Friday (excluding certain holidays) from 9:30 a.m. to 4 p.m., Eastern time.
Electronic exchanges work in a similar way, except that it's computers that connect buyers and sellers.
Listing requirements
Each exchange sets requirements for the stocks traded there. For example, stocks traded on the NYSE must, among other things, have a share price of at least $4 and a market capitalization of at least $4 million.
Other types of requirements involve the way the company reports its financial information and the kinds of board members the company has.
If a company can't maintain the requirements for an exchange, it will be "delisted." But stocks that don't trade on an exchange can still be traded "over the counter," or through a network of dealers.
Over-the-counter (OTC) markets
Effective April 28, 2022, Vanguard no longer accepts purchases and transfers in of most over-the-counter (OTC) securities. Clients can continue to hold and sell their existing positions in these securities. They can also make additional purchases of a small selection of global American Depositary Receipts (ADRs).
Here's how to determine if an ADR won't be restricted. All three of the following criteria must apply to the ADR:
- Consists of a five-letter ticker symbol that ends in "Y." This confirms that it's traded OTC.
- Has a market capitalization of over $300 million (in U.S. dollars). Market capitalization is the total market value of a company's outstanding shares.
- Belongs to the top three tiers of the OTC markets (Pink Current, OTCQB, and OTCQX). These markets are up to date with disclosures and listing requirements.
Stocks can be traded over the counter if they don't meet an exchange's requirements or if the company issuing the stock wants to avoid the costs associated with meeting those requirements. ADRs also often trade over the counter.
Stocks traded over the counter may be very similar to those traded on the exchanges. Some, however, are different—they have very low share prices ("penny stocks") and minimal liquidity (buyers and sellers are harder to come by so orders may not be filled right away or even at all).
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Get more from Vanguard
Talk with one of our investment specialists
Call 800-962-5028
Monday through Friday
8 a.m. to 8 p.m., Eastern time
Ready to start?
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Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.