NASDAQ and Its Role in Current Stock Market

The fact that the NASDAQ is an electronic stock exchange does not mean that there is no human involvement in the trading process. In fact, the terms of all trades are established by market makers, companies that pay for the right to buy and sell one particular stock on the NASDAQ. They are responsible, each day, for determining the buying and selling prices of that stock. They post a price at which they will be willing to buy the stock and a slightly higher price at which they will be willing to sell that same stock. The difference in the two prices, called the spread, allows them to make a profit.

Market makers enter the buy and sell prices for individual stocks into NASDAQ computers, and investors enter their orders to buy or sell stocks into NASDAQ computers. When investors list buying and selling prices that are in synch with the prices listed by market makers, computers process these orders.

In traditional stock trading, such as the trading that occurs at the NYSE, the people who function as market makers are called specialists. Specialists stand at a certain location on the floor of the exchange and personally process buying and selling orders. But trading using a NASDAQ market maker and trading using a NYSE specialist are different in another important way. The NASDAQ is what is called a dealer exchange, while the NYSE is what is called an auction exchange. On the NASDAQ, market makers are dealers of certain stocks. Investors buy stocks from market makers and sell them to market makers. On the NYSE, specialists function as auctioneers. They set prices so that buyers and sellers can make trades with one another.

Older, well-established, reliable companies, such as Ford Motor Company, General Electric, and IBM, typically list their stocks on the NYSE, whose history dates to 1792 and is closely linked to the rise of the American economy in the nineteenth and twentieth centuries. The NASDAQ, by contrast, typically attracts newer companies with smaller initial assets (the money used to start a business) but large potential for growth. Microsoft, Apple, and Google, all among the United States’ most important corporations in the early twenty-first century, listed their stocks on the NASDAQ. Companies that go public (that allow investors to buy and sell their stock) therefore often consider how they want to be perceived (as stable and reliable or as daring and innovative) before deciding whether to list their stock on the NYSE or the NASDAQ.

Because of its concentration of newer and less stable companies, the NASDAQ is generally considered more volatile, as a whole, than the NYSE. As of 2007 the NASDAQ was listing the stock of more companies than the NYSE (roughly 3,200 versus roughly 2,700). The number of trades conducted on the NASDAQ each day is also usually larger than the number conducted on the NYSE, but the NYSE remains the world’s largest stock market in terms of the value of the stock that is bought and sold there. Together these two stock exchanges are among the most important elements of the U.S. economy.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

Tags: Economy, NASDAQ, NYSE, Stock Investing

Category: Stock Markets