Although the following article is more suitable for beginners, it is also extremely interesting for trading sharks to refresh or check out their knowledge.
Whenever someone talks about the stock market as a place where equities are exchanged between buyers and sellers, the first thing that comes to mind is either the New York Stock Exchange (NYSE) or Nasdaq, and that is unquestionable. These two exchanges account for the trading of a major portion of equities in North America and worldwide. Yet, the NYSE and Nasdaq are very different in the way they operate and in the types of equities traded therein. Knowing these differences will help you better understand the function of a stock exchange and the mechanics behind the buying and selling of stocks.
Dealer Vs. Auction Market
The basic difference between the NYSE and Nasdaq is in the way securities on the exchanges are transacted between buyers and sellers.
The Nasdaq is a dealer's market,
wherein market participants are not buying from and selling to one
another directly but through a dealer, who, in the case of the Nasdaq,
is a market maker.
The NYSE is an auction market, wherein individuals are typically buying and selling between one another and there is an auction occurring; that is, the highest bidding price will be matched with the lowest asking price.
Location!
The location of an exchange refers not so much to its street address but the "place" where its transactions take place. On the NYSE, all trades occur in a physical place, on the trading floor in New York City. So, when you see those guys waving their hands on TV or ringing a bell before opening the exchange, you are seeing the people through whom stocks are transacted on the NYSE.The Nasdaq, on
the other hand, is located not on a physical trading floor but on a
telecommunications network. People are not on a floor of the exchange
matching buy and sell orders on behalf of investors. Instead, trading
takes place directly between investors and their buyers or sellers, who
are the market makers
(whose role we discuss below in the next section), through an elaborate
system of companies electronically connected to one another.
Traffic Control
Each
stock market has its own traffic control police officer. Yup, that's
right, just as a broken traffic light needs a person to control the flow
of cars, each exchange requires people who are at the "intersection"
where buyers and sellers "meet," or place their orders. The traffic
controllers of both exchanges deal with specific traffic problems and,
in turn, make it possible for their markets to work. On the Nasdaq, the
traffic controller is known as the market maker, who, we already
mentioned, transacts with buyers and sellers to keep the flow of trading
going. On the NYSE, the exchange traffic controller is known as the
specialist, who is in charge of matching up buyers and sellers.
Perception and Cost
One
thing that we can't quantify but must be aware of is the way that the
companies on each of these exchanges are generally perceived by
investors. The Nasdaq is typically known as a high-tech market,
attracting many of the firms dealing with the internet or electronics.
Accordingly, the stocks on this exchange are considered to be more
volatile and growth oriented. On the other hand, the companies on NYSE
are perceived to be more well established. Its listings include many of
the blue chip firms and industrials that were around before our parents,
and its stocks are considered to be more stable and established.Whether a stock trades on the Nasdaq or the NYSE is not necessarily a critical factor for investors when they are deciding on stocks to invest in. However, because both exchanges are perceived differently, the decision to list on a particular exchange is an important one for many companies. A company's decision to list on a particular exchange is also affected by the listing costs and requirements set by each individual exchange. The entry fee a company can expect to pay on the NYSE is up to $250,000 while on the Nasdaq, it is only $50,000 to $75,000. Yearly listing fees are also a big factor: on the NYSE, they based on the number of shares of a listed security, and are capped at $500,000, while the Nasdaq fees come in at around $27,500. So we can understand why the growth-type stocks (companies with less initial capital) would be found on the Nasdaq exchange.
Public Vs. Private
Prior
to March 8, 2006, the final major difference between these two
exchanges was their type of ownership: the Nasdaq exchange was listed as
a publicly-traded corporation, while the NYSE was private. This all
changed in March 2006 when the NYSE went public after being a
not-for-proft exchange for nearly 214 years. Most of the time, we think
of the Nasdaq and NYSE as markets or exchanges, but these entities are
both actual businesses providing a service to earn a profit for
shareholders.The shares of these exchanges, like those of any public company, can be bought and sold by investors on an exchange. Inter alia, both the Nasdaq and the NYSE trade on themselves. As publicly traded companies, the Nasdaq and the NYSE must follow the standard filing requirements set out by the Securities and Exchange Commission. Now that the NYSE has become a publicly traded corporation, the differences between these two exchanges are starting to decrease, but the remaining differences should not affect how they function as marketplaces for equity traders and investors.