The Big Board vs. Nasdaq – what’s the difference?
Now that the stock market has successfully recovered from a prolonged bear market, more and more people are interested in investing in stocks again. If you’re one of the many who have decided to take a closer look now that things seem to be doing better, you may be wondering where you need to go in order to purchase equity securities. After all, you may be thinking, aren’t there two big markets I can buy stocks from?
The two major markets where stocks are bought and sold are the New York Stock Exchange, and the Nasdaq Stock Market. While the idea is the same (trading stocks), and both provide the same result (you can buy and sell at either one), the methods by which they go about it are very different. First, some background information might be helpful.
The first stock exchange in America was actually organized in Philadelphia in 1790. But the center of market action drifted over the years, and the traders who met every day under the buttonwood tree on Wall Street adopted the name New York Stock Exchange back in 1817. The NYSE eventually evolved into a private association that sells memberships, or seats, permitting brokers to trade on the exchange. Generally, the cost of a seat rises and falls with the market.
Considered a “traditional” exchange, the NYSE provides not only the physical location for stock trading, but also the rules for how its trades are handled. The exchange does not, however, have any say in setting the price of any given stock. The price is set by the trading process, and follows the law of supply and demand. The type of trading that occurs on the floor of the NYSE is referred to as “auction style.” This means that in every transaction, stock is bought for the lowest price or sold to the highest bidder.
While there are hundreds of brokers roaming the floor at the NYSE filling stock orders, the people known as specialists are an important fixture on the exchange. Acting as brokers to the brokers, specialists maintain order in the market. The floor brokers bring their orders to the specialists, and they process transactions as buy and sell orders move in response to price changes.
The Nasdaq opened in 1971 as the world’s first electronic market. Unlike a traditional exchange, the Nasdaq Stock Market does not have a central trading floor. This market consists of an advanced telecommunications and computer network run by the National Association of Securities Dealers (NASD).
Trading on the Nasdaq happens in an open market, multiple dealer system. Many different market makers – dealers who stand ready to buy or sell large quantities of specific securities – compete to handle the hundreds, even thousands of transactions that occur in each individual stock. This market system is a sharp contrast to the traditional exchange system found on the NYSE, in which the majority of buy and sell orders in a particular stock still go through the floor of the exchange.
While the NYSE is venturing into the world of electronic trading, the specialists and the brokers on the floor still play a major role in trading, keeping a human element in much of the process.
While this is just an introduction to the action that takes place at the NYSE and the Nasdaq, hopefully it will give you a better understanding of how these two different systems work. When it comes to investing, stocks are usually one of the basic building blocks of a typical investment portfolio. The more you know about how those stocks are traded, the better prepared you’ll be to make educated investment decisions.
This article provided by Tony Pochiro of A.G. Edwards & Sons, Inc. (440-725-9099) Member SIPC (email@example.com).
POSTED 06/15/2007 00:01