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Stock Exchange refers to:
-
A place where stocks,
bonds, or other securities are bought and sold.
-
An association of
stockbrokers who meet to buy and sell stocks and bonds according
to fixed regulations.
What are 2 major Stock
Exchanges? Article from Investopedia.com in "plain English":
The NYSE
And Nasdaq: How They Work
by Investopedia Staff, (Investopedia.com)
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 there's no debate over why. These two exchanges
account for the trading of a major portion of equities in North
America and worldwide. At the same time, however, 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.
Location, Location, 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.
Dealer vs. Auction Market
The fundamental 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,
which, 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. (For more on different types of markets, see
Markets Demystified.)
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.
The definitions of the role of the market maker and that of the
specialist are technically different; a market maker creates a
market for a security, whereas a specialist merely facilitates it.
However, the duty of both the market maker and specialist is to
ensure smooth and orderly markets for clients. If too many orders
get backed up, the traffic controllers of the exchanges will work
to match the bidders with the askers to ensure the completion of
as many orders as possible. If there is nobody willing to buy or
sell, the market makers of the Nasdaq and the specialists of the
NYSE will try to see if they can find buyers and sellers and even
buy and sell from their own inventories. (To learn more, see
What's the difference between a Nasdaq market maker and an NYSE
specialist?)
Perception and Cost
One thing that we can't quantify but must acknowledge is the way
in which 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 affected also 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-$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. (For further
reading, see What
are the listing requirements for the Nasdaq?)
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. (Incidentally, 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 (for standard filing requirements see Market Regulations). 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.
Conclusion
Both the NYSE and the Nasdaq markets accommodate the major portion
of all equities trading in North America, but these exchanges are
by no means the same. Although their differences may not affect
your stock picks, your understanding of how these exchanges work
will give you some insight into how trades are executed and how a
market works. (For further reading, see
Understanding Order Execution.)
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