Stock Exchange

A stock exchange is an organised market that brings supply and demand together according to fixed rules. It concentrates trading in time and place and supervises the formation of prices. A distinction is made between the spot market and the futures market, and between floor trading and fully electronic trading; today, the vast majority of trading is electronic. Instruments traded on exchanges include shares, bonds, currencies and commodities. The aim is to reduce transaction costs, increase market transparency and create market liquidity.

The stock exchange within the capital market

From a functional point of view, the capital market can be divided into the primary market and the secondary market. On the primary market, securities and the rights and obligations attached to them are issued for the first time, which is why it is also called the issuing market. The secondary market covers the trading that begins once the securities have been issued. It is a highly organised trading venue – the stock exchange – with standardised products and processes, on which securities change hands.

The three basic functions of a stock exchange

1. Allocation function

The allocation function is the most important task of a stock exchange. It is fulfilled when investors' capital is channelled into its best possible use and investment projects are financed from the most favourable sources of funding. If capital flowed into an investment that carried a higher risk than another investment offering the same return, it would not be put to its best use. The allocation function is therefore best fulfilled when investors always receive the same risk premium for the same level of risk.

2. Market function

The market function is a prerequisite for the allocation function. It means bringing together and coordinating individual buying and selling interests at one point in time and in one place. This place does not have to be a physical trading floor; it can also be a virtual construct. Thanks to this function of the stock exchange, market participants no longer need to negotiate with each other individually. This in turn leads to considerably lower transaction costs and greater market liquidity. The exchange also solves the problem of divisibility.

A company as such cannot be divided, because its assets and liabilities generate the cash flow reflected in its market value only in combination. On the stock exchange, by contrast, investors acquire a share of the whole. Divisibility therefore creates additional liquidity and opportunities for diversification and appeals to a wider range of investors. The problem of an investment's payback period is also removed, because investors on the stock exchange value a financial instrument on the basis of its future cash flows. An investor could therefore recover the capital invested at any time by selling on the stock exchange.

3. Price formation and valuation function

Economic agents make their plans on the basis of certain expectations. If all individuals have the same information at the same time, they form homogeneous expectations, which are then reflected in the price. How well the price formation function is fulfilled therefore depends on the degree of informational efficiency: the higher it is, the more closely the price of a security will correspond to its fair value.

In summary, the services a stock exchange provides consist of four transformations: of maturities (long-term financing for companies, short-term liquidity for investors), of lot sizes (large capital requirements broken down into small, tradable units), of risks (spread across many investors) and of location (participants from different places brought together in one market).

How are prices determined?

Securities prices result from supply and demand. The price is set at the level at which the largest possible volume can be traded, that is, where the most buy and sell orders from market participants can be matched. In Germany, prices used to be fixed by officially appointed and independent brokers; the role of the official broker was abolished in 2002. Today, prices are mostly determined by electronic trading systems that match orders in a central order book, as on Xetra, or with the help of specialists and market makers who ensure that trading takes place.

What are market makers?

Market makers are brokers or other market participants who ensure continuous trading by quoting buy and sell prices. This is precisely where a conflict of interest can arise, as the market maker tries to buy cheaply in order to sell at a higher price. As a result, an issuer acting as market maker, for example for certificates or warrants, may widen the spread between the bid and ask prices. Nevertheless, this is not the rule, and competitive pressure means that most issuers try to provide a realistic price.

What is a broker?

A broker is the intermediary between the trader and the stock exchange. For exchange-traded securities, the broker passes buy and sell orders directly on to the exchanges. With CFDs, by contrast, the broker is the counterparty to the contract, and the trade does not take place directly on an exchange. Brokers earn most of their income from order fees, financing charges, the spread and other transaction costs. There are a great many brokers, so it pays to research them thoroughly in order to know whom you are entrusting your money to. The cheapest is not always the best: important factors include, for example, proper regulation, customer support that is easy to reach in your own language and transparent costs. Comparing several brokers before opening an account is therefore worthwhile.

What is an ECN broker?

ECN stands for electronic communication network, an electronic system that automatically matches buy and sell orders between market participants. In retail trading, the term ECN broker mainly refers to brokers specialising in forex trading. ECN brokers never take the opposite side of their clients' positions. Instead, they provide a marketplace on which banks, market makers and traders, for example, can trade directly with one another. This results in tight spreads during the main trading hours, which is very advantageous for active traders. In return, ECN brokers usually charge a commission per trade.

Is the stock exchange a perfect market?

Economic theory often refers to a perfect market in order to explain certain models more clearly, as this makes it possible to explain very complex relationships. A market is said to be perfect if the following conditions are met:

• Complete transparency: all market participants have full information about prices and offers at all times.
• Homogeneous goods: the assets traded are identical, so buyers have no preference for a particular seller.
• Rational behaviour: all market participants act rationally and aim to maximise their benefit.

This makes it clear that the stock exchange is not a perfect market either. There can be no complete transparency, for example, because some market participants always have an information advantage. In addition, information is not available free of charge, which in itself leads to differences in what participants know. Nor will there ever be market participants who act entirely rationally. Consequently, no market will ever achieve this ideal. Nevertheless, a stock exchange comes fairly close to the model.

Why is the stock exchange important?

The basic functions of the stock exchange already explain why this institution is so important. Without the stock exchange, the economy would be far less dynamic, because there would be less liquidity in the market and companies could not develop as they do. In addition, investors would find it difficult to earn returns, and capital would not be channelled into its most efficient use. The stock exchange therefore makes a decisive contribution to prosperity in society.

Who invented the stock exchange?

The stock exchange developed gradually as an institution. Initially, merchants met to trade goods with one another, with agricultural products at the centre of their business. The first forward transactions were already concluded on these commodity exchanges, with a buyer purchasing a farmer's future harvest in advance. In Bruges, merchants met at the inn of the Van der Beurze family, and in 1409 this meeting place was institutionalised as an exchange, often regarded as the first of its kind. The word "bourse", still used for stock exchanges in many languages, is commonly traced back to the family's name.

As trade grew, it became clear that it also brought the problem of payment difficulties. Trading in bills of exchange therefore became increasingly important, and the first exchanges for this type of security emerged. Trading in company shares was not yet on the horizon. It only emerged in the early 17th century, when shares in the Dutch East India Company, founded in 1602, began to change hands in Amsterdam; the Amsterdam exchange is therefore often regarded as the first modern stock exchange. Share trading became more widespread in the 18th century, for example in London and New York.

Who supervises stock exchanges?

Stock exchanges are monitored by exchange supervisory authorities. They grant the licence to operate an exchange, ensure that trading is conducted properly and make sure that the legal framework is complied with. In Germany, this is the responsibility of the exchange supervisory authority of the federal state in which the exchange is located, while the Federal Financial Supervisory Authority (BaFin, see below) supervises securities trading as a whole, for example to prevent insider trading and market manipulation. In the United States, exchanges are overseen by the Securities and Exchange Commission (SEC).

How can you make money on the stock exchange?

The answer is fairly simple, because it is the same as in every other profession in which people earn money: you need sound training. Of course, there are cases in which someone has backed the right security through sheer luck, but these are the exception. Professional traders do not leave success to chance. They try to generate profits with a reproducible strategy, and good trading education improves their chances of success. Nevertheless, profits are never guaranteed: every trade carries a risk of loss, which is why consistent risk management is essential.

What market phases are there?

For centuries, the bull and the bear have stood for the ups and downs of the markets. The origin of the terms has not been clearly established, and there are various theories about it. The most common and best known is that the bull thrusts its horns upwards at its attackers and therefore stands for rising prices, while the bear strikes downwards with its paw and therefore stands for falling prices. French speakers still prefer the terms hausse and baisse, which are also used in German.

What is a bear market (baisse)?

When prices on the stock markets fall over a medium- to long-term period, this is known as a baisse, often also called a bear market. As a rule of thumb, a market is said to be in a bear market once prices have fallen by 20% from their previous high. The opposite of a bear market is a bull market (hausse): a rising market with a price increase of 20%.

What is a bull market (hausse)?

When prices on the stock markets rise over a medium- to long-term period, this is known as a hausse, often also called a bull market. As a rule of thumb, a market is said to be in a bull market once prices have risen by 20% from their previous low. The opposite of a bull market is a bear market (baisse): a falling market with a price decline of 20%.

What is a stock market crash?

A stock market crash is an exceptionally sharp fall in prices within a short period (a day to several days), triggered by mass selling and panic. It usually occurs at the end of a speculative bubble, when high prices can no longer be justified by fundamentals, or as a result of unexpected negative events. The steep fall in prices triggers one stop-loss order after another, accelerating the slump, without any strong buying interest emerging. There is no generally accepted definition of how large a fall has to be to count as a crash. A famous example is "Black Monday" on 19 October 1987, when the Dow Jones Industrial Average lost around 22.6% in a single day.

Stock exchange trading hours

Besides the Frankfurt Stock Exchange with its electronic trading system Xetra, Germany has several other exchanges whose trading hours differ: the regional exchanges in Stuttgart, Düsseldorf, Hamburg, Hanover and Munich, and Tradegate BSX in Berlin, which was formed on 1 January 2026 from the merger of Tradegate Exchange and the Berlin Stock Exchange. The table lists them together with the most important exchanges worldwide (regular trading hours on weekdays as of 2026, in Central European Time):

Auctions, public holidays and special sessions can shift these times, and exchanges adjust their hours from time to time. Because Europe and the US switch to and from summer time on different dates, US trading opens at 14:30 CET for a few weeks each spring and autumn. Trading hours are also being extended in many places: in April 2026, the SEC approved Nasdaq's plan to trade shares 23 hours a day on weekdays, and the London Stock Exchange has announced evening and overnight trading from 2027. The forex market, by contrast, has no central exchange: currencies are traded over the counter around the clock from Monday to Friday.

Important exchanges and market segments

Xetra

The electronic trading system Xetra (Exchange Electronic Trading) is a trading venue of the Frankfurt Stock Exchange operated by Deutsche Börse. Introduced in 1997, it replaced its predecessor, IBIS. According to Deutsche Börse, well over 90% of all share trading on German exchanges is handled via Xetra. Regular trading hours run from 09:00 to 17:30 CET.

Deutsche Terminbörse (DTB)

The Deutsche Terminbörse (DTB), Germany's futures and options exchange, was founded in 1988 with its own electronic trading systems in order to replace outdated floor trading and make trading simpler. The DTB offered investors and traders more transparency, guaranteed fulfilment of all transactions without payment or delivery risk, improved liquidity and settlement through its electronic system. Trading started on 26 January 1990, initially only in options; futures followed later. In 1998, Deutsche Terminbörse GmbH merged with the Swiss futures and options exchange SOFFEX, and the combined exchange is known today as Eurex.

Eurex

Eurex (European Exchange) has been the successor to the Deutsche Terminbörse since 1998. It is operated by Deutsche Börse, which has been its sole owner since acquiring the 50% stake held by SIX Swiss Exchange in 2012, and is one of the world's largest derivatives exchanges for futures and options. Participants from around the world trade around two billion contracts there every year (about 2.07 billion in 2025), making it one of the most liquid markets in the world.

Neuer Markt

The Neuer Markt ("New Market") was a segment of the Frankfurt Stock Exchange for growth stocks that existed from 1997 to 2003. It comprised many young growth companies that enjoyed an extraordinary boom around the turn of the millennium on the back of the technology boom. The bursting of the technology bubble and the heavy price losses on the stock markets led to the closure of the segment in 2003.

NYMEX

The New York Mercantile Exchange (NYMEX) is North America's largest commodity futures exchange for energy and precious metals. Founded in 1872, it offers futures and options on commodities such as crude oil, including the US benchmark WTI, and natural gas, as well as, through its COMEX division, metals such as gold and silver. NYMEX merged with COMEX in 1994 and has been part of CME Group since 2008.

NYSE

The New York Stock Exchange (NYSE) is one of the largest and most important stock exchanges in the world; measured by the market value of their listed companies, the NYSE and Nasdaq are the two largest exchanges. The NYSE is located on Wall Street in New York, which is why the name Wall Street is often used as a synonym for it. Its history began in 1792 with five listed securities. During the 2008 financial crisis, trading volumes on the NYSE reached what were then record levels of several billion shares a day. In 2007, the NYSE merged with the European exchange operator Euronext; since 2013, it has belonged to Intercontinental Exchange (ICE), which spun Euronext off again in 2014.

Other useful facts about stock exchanges

What is BaFin?

The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is a German federal institution under public law whose aim is to ensure a functioning and stable German financial system. It supervises financial services providers, banks, insurers and securities trading; since November 2014, the largest banks in the euro area have been supervised directly by the European Central Bank (ECB) in cooperation with national supervisors such as BaFin. BaFin itself is subject to the legal and technical oversight of the Federal Ministry of Finance.

On 1 May 2002, the Federal Banking Supervisory Office (BAKred) was merged with the then Federal Securities Supervisory Office (BAWe) and the Federal Insurance Supervisory Office (BAV) to form BaFin.

What is triple witching?

Triple witching refers to the third Friday of the months of March, June, September and December. Because futures and options on indices such as the DAX and the Euro Stoxx 50, as well as options on individual shares, expire or are settled on this day, volatility in the markets tends to increase. Market participants try to influence prices at expiry, which can lead to movements that cannot be explained by fundamentals – hence the comparison with witchcraft.

What is an issuer?

An issuer is an institution, such as a company, a government or a bank, that issues securities to investors. The German term Emittent comes from the Latin emittere, meaning "to send out" or "to issue". The securities issued can be, for example, shares, fund units or bonds. The purpose of issuing them is to increase the issuer's capital and, in the case of shares, its market capitalisation.

What is an index?

An index is a statistical tool that expresses the changes in a defined group of securities as a single figure. A stock index, accordingly, measures and statistically calculates the performance of a group of shares. Indices of this kind exist worldwide for commodities and for all types of securities. A distinction is made between price indices and performance indices: a price index reflects only price changes, whereas a performance index also assumes that dividends and other distributions are reinvested. The DAX, for example, is a classic performance index, whereas the Dow Jones Industrial Average belongs to the category of price indices. Index compositions are reviewed regularly: the DAX, Germany's leading share index, has comprised 40 companies since September 2021, while the Dow Jones consists of 30 stocks.

What is the interbank market?

The interbank market is the worldwide market on which banks trade with one another. Above all, they trade currencies, shares and fixed-income securities and lend each other short-term funds. Banks primarily want to earn interest on liquid funds they do not currently need. The interbank market also forms the core of the foreign exchange market: the prices that brokers quote to private forex traders are largely based on interbank prices.

What is the spot market?

On the spot market, also called the cash market, transactions are settled immediately after they are concluded or within a short period, traditionally no later than two business days afterwards (T+2). In the US, the standard settlement cycle for shares was shortened to one business day (T+1) in May 2024; the EU, the UK and Switzerland plan to follow on 11 October 2027. In the forex market, spot transactions are generally settled two business days after the trade. On the futures market, by contrast, the conclusion and the fulfilment of a contract are separated in time.

What is after-hours trading?

Trading after the regular session of an exchange has closed, for example on other trading venues or in extended sessions, is known as after-hours trading. Developments in after-hours trading can give an indication of the direction of the next trading day. In general, however, it is less relevant, because volumes are low compared with the main trading hours, which makes price movements less meaningful.

What is pre-market trading?

Trading before an exchange opens, for example on other trading venues or in extended sessions, is known as pre-market trading. Developments in pre-market trading can give an indication of the direction of the coming trading day. In general, however, it is less relevant, because volumes are low compared with the main trading hours, which makes price movements less meaningful.

What is XTF?

XTF is a market segment of the Frankfurt Stock Exchange, launched by Deutsche Börse in 2000, in which exchange-traded index funds (ETFs) and actively managed exchange-traded funds are traded. Trading takes place via the electronic trading system Xetra.

What is a paying agent?

A foreign fund company that wanted to distribute its funds in Germany traditionally had to appoint a German paying agent. As a rule, this is a bank through which purchases and sales of fund units are processed. For funds from other EU countries, this requirement was replaced in August 2021 by EU rules on the cross-border distribution of funds: instead of a local paying agent, the fund company must provide facilities for investors, which can also be offered electronically. More generally, a paying agent is a bank that makes interest, dividend and redemption payments on behalf of an issuer.

What are subscribers?

Subscribers are the individual investors in a closed-ended fund. If, for example, you want to invest in a closed-ended real estate fund that targets an investment in a specific building, you subscribe to the fund and appear in its documentation as a subscriber. The subscriber participates in the fund company with the subscription amount they have chosen. More generally, anyone who commits to buying newly issued securities, for example in an IPO or a bond issue, is called a subscriber.