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Exchanges: Investing Essentials

http://www.fool.com/investing/brokerage/2014/08/04/exchanges-investing-essentials.aspx

Dan Caplinger
August 4, 2014


New York Stock Exchange. Source: Wikipedia.

Wherever people seek riches, there's often as much money to be made helping people seek their fortunes as there is in looking for fortune yourself. During gold rushes, sellers of picks and shovels often made out quite handsomely no matter how much of the yellow metal turned up in the vicinity.

With millions of investors looking to the stock market and other financial markets to become wealthy, the exchanges on which stocks and other securities trade hands have become quite profitable in their own right. Among exchanges, those that trade stocks, such as the New York Stock Exchange, are the ones that the general public knows best. But exchanges span the entire breadth of the financial market, with different opportunities for exchanges serving different niche specialties. Let's take a closer look at exchanges and how they can actually make money for the shareholders who own their stock.

What are exchanges?

Exchanges are places where members can buy or sell certain types of securities, with the most common including stocks, bonds, commodities, options, futures, and foreign currency. Some exchanges specialize in just one specific area, while others pride themselves on having several different types of assets available for market participants to trade.


New York Stock Exchange.

From an investing standpoint, exchanges earn money primarily in a couple of ways. First, they sell the right to make transactions through the exchange, with some selling permanent "seats" on their exchanges while others use short-term licenses to earn recurring revenue. Historically, members were willing to pay millions for seats on the most popular exchanges. Exchanges also often collect listing fees from the companies that want their securities to be available on a given exchange. For instance, the NYSE charges as much as $500,000 annually for listing fees, with the exact fee based on total numbers of shares outstanding and available for trading.

What is the history of exchanges?

Securities exchanges have existed for centuries, with some looking at the early Western European colonial period as the first major use of share trading as investors bought into exploratory expeditions. Others argue that the Roman Empire had securities resembling modern-day stock to some extent, with various ways to trade those securities constituting exchanges of a sort.

Most modern stock exchanges have come into being over the past several hundred years, with the forerunner of the London Stock Exchange taking shape in the late 17th century. The New York Stock Exchange traces its origins to the signing of the Buttonwood Agreement, under which 24 New York City brokers agreed to trade five different securities at a location on Wall Street.

Not all exchanges have such a long history, though. The Nasdaq Stock Exchange began trading in 1971, with the National Association of Securities Dealers creating the first electronic stock market in the world. In the commodities market, the Chicago Board of Trade was started in 1848, while the New York Mercantile Exchange dates its origins to a dairy-products exchange started in 1872 that broadened its scope 10 years later.


Nasdaq Stock Exchange.

How many exchanges are there?

Around the world, there are dozens of major stock exchanges, as well as numerous exchanges trading other fi