The New York Stock Exchange and the NASDAQ they are two of the stock exchanges with the most reference in the United States. Because many of the companies listed on these exchanges do business in multiple countries, the NYSE and NASDAQ are also barometers of the global economy. Although most retail investors do not pay attention to the differences between the two exchanges, the trading style and regulations of the exchanges create a difference in the type of companies found on the exchanges. These differences can also change investors’ expectations.
Know which stock you are buying, NASDAQ or NYSE
My first introduction to the stock market as a child did not include the difference between stocks listed on the NASDAQ and the NYSE and I did not know there was a difference. But when I started writing about investing, my curiosity got the better of me. There had to be a reason why there were different exchanges and I wanted to know what.
While most of the differences are not particularly significant to investors, there are some that can inform your investment decisions. More importantly, there are key differences between the two exchanges that could determine which exchange a company chooses to list its shares on.
What are the New York Stock Exchange and the NASDAQ?
The New York Stock Exchange (NYSE) and the NASDAQ are two of the largest stock exchanges in the world. Both are based in New York, although the shares in them can be traded around the world.
The NYSE has been around since the early days of the United States. It was founded in 1792. The NASDAQ, on the other hand, is a relatively new exchange. It has only been around since 1971. This fact, in itself, provides a clue to one of the key distinctions between the exchanges. The NYSE consists primarily of top-tier companies that have large market capitalizations, while the majority of NASDAQ stocks are newer companies.
The NYSE and NASDAQ give growth investors a clue as to how much risk the market is willing to absorb at any given time. For example, when you hear that the Dow is up (which usually means the NYSE is up), it usually signals a time when investors may be less inclined to take risks. But when the NASDAQ is up and the Dow is down or down, it usually means that investors have more confidence in the global economy and are willing to take on more risk.
This is a brief history of the NYSE
For an institution vitally important as the financial center of American business, the New York Stock Exchange had the humblest of beginnings. On May 17, 1792, 24 stockbrokers signed what became known as the Buttonwood Agreement on Wall Street. The reason the agreement got that name was that it was signed under a Buttonwood tree.
The deal formed a centralized exchange for the growing stock market in the newly formed nation. The agreement eliminated the need for auctioneers, who often used to trade commodities such as wheat and tobacco, and established a commission rate. At first, the new exchange focused on government bonds.
It would be 25 years later, in 1817, when the stock exchange changed its name to the New York Stock & Exchange Board which later became the New York Stock Exchange. It is also when the exchange expanded beyond government bonds and bank stocks to become the financial center of the United States. The exchange moved to its current, iconic location at 11 Wall Street in 1865.
A brief history of the NASDAQ exchange
The NASDAQ (which stands for the National Association of Securities Dealers Automated Quotations) was created to give mid- and small-cap stocks an opportunity to raise capital. In the beginning, the NASDAQ provided stock quotes and matched buyers and sellers with dealers.
However, as it gained popularity, speculative over-the-counter (OTC) stocks began to be traded on the stock market. It also began to attract the attention of technology stocks. Some of the most well-known tech stocks, including all FAANG stocks (Facebook, Amazon, Netflix and Alphabet/Google) are listed on the NASDAQ stock exchange. During the dot-com boom of the late 1990s, many start-up companies (what today would be called unicorn stocks) listed on the NASDAQ.
The NYSE and NASDAQ are different beasts
The NYSE conducts operations in an auction style. Brokers buy stocks on behalf of their clients or companies. Exchanges take place between two individuals on the floor of the exchange. Each order includes a broker who will call a floor broker or enter the order electronically and a specialist who acts as a market maker for that stock. The specialist posts bid and ask prices and manages the actual execution of trades.
The NYSE is the stock market that is characterized by old movies. Traders running around the floor with written buy and sell orders looking to negotiate a deal on behalf of a company or client. In fact, the NYSE is the origin of the “ticker tape” parade where filled orders were thrown out of office windows to celebrate the parade’s honorees.
The NASDAQ, on the other hand, is an electronic exchange. No physical interaction is required to operate. All transactions are processed electronically. Because of this, buyers and sellers are matched in fractions of a second. Unlike the NYSE, each stock on the NASDAQ has multiple market makers to help ensure liquidity. Apple, for example, has 54 registered Market Makers. Because all transactions are electronic, the NASDAQ has a longer trading day that allows active trading for several additional hours each day.
With the advent of more sophisticated trading technology, the difference in trading structures between the two exchanges has become more subtle. For example, the NASDAQ now automatically matches buyers and sellers similar to an auction system. Conversely, the NYSE relies heavily on computers to facilitate its operations. However, only the NYSE retains the presence of human “brokers” who run the trading floor.
Listing requirement for NYSE?
The NYSE includes approximately 2,400 companies with a market capitalization of more than $26 trillion. The NYSE has stricter guidelines governing the types of companies that can be listed on the exchange. Once a company is listed on the NYSE, it can be delisted if it does not meet these requirements. These are the main requirements that all companies must meet:
- The company must have at least 2,200 shareholders
- The company must trade more than 100,000 shares per month
- The company must have a market valuation of more than $100 million
- The company is expected to generate more than $75 million in annual revenue
Listing requirement for NASDAQ?
The NASDAQ has more than 3,800 listings with a total market capitalization of $11 trillion. To understand NASDAQ’s listing requirements, it is important to understand that NASDAQ is a company as well as an exchange. This means that all companies wishing to list on the stock exchange must pay an initial listing fee in addition to an annual fee. Both rates are set based on the size of the company.
- The listing fee is between $5,000 and $75,000
- The annual fee is between $42,000 and $155,000
In addition to paying the fees, companies must meet additional requirements including:
- Provide quantitative financial documents (revenue, market capitalization and assets)
- Provide details on their corporate governance standards that give clear guidance on issues such as shareholder rights and annual meetings.
Like the NYSE, once companies go public, they must continue to meet regulatory requirements, including making financial information about the company and the stock available to the public. Companies must also comply with SEC requirements. All this is done to ensure transparency to investors.
What stock market is Dow stock traded on?
The Dow Jones (also known as “The Dow”) is an index of the 30 largest companies in terms of company scale and returns. When stock reports refer to “The Dow rose X number of points” or “The Dow fell X number of points”, they are referring to the average of those 30 stocks. It is considered a broad view of the market in general. Dow 30 companies make up the Dow Jones Industrial Average (DJIA). An individual stock may be listed on either the NYSE or the NASDAQ (but not both).
Listed on the NYSE or the NASDAQ, what’s the difference?
Generally speaking, if a company can meet the NYSE’s requirements, it is advantageous for it to make an initial public offering (IPO) on the NYSE. This is because companies listed on the NYSE can generate more funds when they hold their IPO on that exchange.
However, since these requirements are too strict for many companies, the NASDAQ is a viable alternative. That’s why many of today’s “unicorn” stocks hold their IPOs on the NASDAQ. To further illustrate this, 34 initial public offerings (IPOs) were listed on the NYSE in 2016. This was only three percent of the total IPO volume worldwide. In contrast, this same year, the NASDAQ had 77 IPOs, which was seven percent of global IPOs, more than double that of the NYSE.
What stock market listing means for investors
The NYSE is made up of some of the most venerable companies in the country. These companies have a large market capitalization and, for the most part, are in a mature stage of their business. But with its size, the opportunities for growth are somewhat limited. After all, most investors don’t expect robust growth in top-tier stocks. They are looking for stability and possibly a dividend.
The NASDAQ, on the other hand, is generally populated by younger, growth-stage companies. For this reason, NASDAQ-listed companies have historically generated slightly higher returns. But these returns come with added risk.
The final word on the NYSE and NASDAQ
The New York Stock Exchange and the NASDAQ are two of the most well-known stock exchanges in the world. When NASDAQ first opened in the 1970s, it was a very different experience that offered start-ups an innovative alternative to the stricter NYSE. In fact, today the NASDAQ is the largest electronic stock exchange with more than 3,000 listed companies. And while the NYSE is typically defined by companies by market capitalization, the five largest companies by market capitalization are listed on the NASDAQ.
Although the NYSE’s requirements still limit the number of companies that can join, the emergence of electronic trading has made the mechanics of buying and selling between the two exchanges very similar.